PENSION saving might not be top of your list with so many costs rising, but the earlier you start, the less you need to save.
Our Squeeze Team expert Romi Savova, founder of PensionBee, has crunched the numbers and found that saving £3 a day from the age of 20 could give you a pension pot worth £330,000 by the time you retire.
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That’s around the cost of a daily coffee, so if you’ve got an expensive caffeine habit, smoke, or regularly buy takeaway lunches, consider cutting back for the sake of your future self.
Savova is just one of the experts on our brand new Squeeze Team, which is here to help you save money.
Whether you’re worried about paying your bills, need to clear debts or don’t know what to do with your pension, get in touch by emailing [email protected].
Savova says the most important thing to remember about retirement saving is that the earlier you start, the less you need to put aside.
This is because of something called compound interest, where the returns you make back on your investments are reinvested, meaning your savings grow exponentially over time.
The team at PensionBee has done some calculations to show just how little you need to start saving early to reach your retirement goal.
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They found that a 20-year-old who wants to retire at 67 could build up a retirement pot of £328,000, by saving just £3 a day.
It’s impossible to calculate exactly what annual income that would provide in the future, but someone with a pot of that size who was retiring today at the age of 67 could expect to get an income of roughly £21,500 per year including the state pension.
On top of this, they would get a tax-free lump sum of around £82,000.
The figures are based on someone buying an annuity, which is a product that provides a guaranteed income for life.
If the same person waited until they were 25 – they’d have around £80,000 less in their final pot at £247,000 This would be equivalent to a pension income of around £18,500 including state pension and with a lump sum of roughly £62,000.
Leaving it until 35 to start saving means they’d end up with just £135,000, or around £14,500 a year and a lump sum of £34,000.
Waiting until 45 would mean they’d have £62,000, or around £11,500 a year to live on and a lump sum of £15,500.
This isn’t just because someone who starts young has more years to save, it’s also because compound interest makes that money go much further the longer it has to work.
Savova says: “The profit that you make on your initial saving keeps getting reinvested and then the profit on that gets reinvested, ultimately helping you build up a bigger and bigger pension.
“If you can make small cuts in the daily routine and channel them into your pension, regardless of your age, then this will help you build something up. It’s a matter of discipline – and if you can just reward yourself daily with that saving, it will go a long way.
“The earlier you start, the better. If you start at 25, the impact of saving £1 is considerably larger than if you start at 55.”
As part of our Squeeze Team campaign, Savova has shared some of her top pensions tips to get people on the savings ladder:
Work out how much you need for retirement
Before you can figure out how much you need to save each week or month, it’s important to have a goal.
That total figure will depend on what you earn while you’re working, what age you plan to retire, and how long people typically live for.
If the number is huge, don’t panic, remember you’re saving up over many years and investment returns will help you plug the gap.
Savova says: “It’s estimated most people will need about 70% of their salary to live comfortably in retirement, however, this largely depends on individual circumstances and lifestyle.
“An online pension calculator can help you decide how much you’ll need to save to be able to retire at your preferred age.”
Work out what you’ve already got
Most people will already have some savings, particularly since auto-enrolment rules mean everyone who earns over £10,000 from a single employer gets automatically put in a scheme.
Minimum auto-enrolment rules mean you should already be saving 8% of your salary. This is made up of 4% that comes from you, 1% from the government as tax relief and 3% is free cash from your employer.
If you don’t meet the requirements for auto-enrolment, it’s worth asking to be enrolled anyway. If you earn over £6,240 a year, your employer will still have to contribute, and even if you don’t you’ll still get the government boost for free.
Most working people will also be making national insurance contributions, which count towards the State Pension.
The state pension currently stands at over £9,000 a year, and it usually rises each year to keep pace with inflation.
Savova says: “Currently, all workers need to have paid National Insurance Contributions (NICs) for at least 10 years to qualify for the basic State Pension. To receive the full amount of £179.60 per week (2021/2022), you’ll need to have paid NICs for at least 35 years.”
If you’re out of work, you must check if you are eligible for National Insurance Credits.
These count towards your state pension and are available for a wide range of people including parents with childcare responsibilities, people caring for older relatives and anyone on certain benefits.
Boost your savings
Once you know what you’re aiming for and what you’re already saving, it’s time to start thinking about contributing more.
Even if you start small, you can ramp up the savings at key moments such as when you get a promotion or pay rise, or add extra cash in if you have an inheritance.
As the PensionBee figures show, even a little can go a long way here, and the government tax relief guarantees you a good return straight away on whatever you put in.
Savova says: “A little can go a long way in terms of pension savings so, if you can, try increasing your current level of contributions by an additional 1-2% of your salary.
“For every £100 you pay into your pension, the government adds another £25 in the form of tax relief. You can claim more tax relief through Self-Assessment if you’re a higher or additional rate taxpayer.”
Some employers even offer matching, so they’ll give you more free cash if you save more. Speak to your HR team to see if that’s available through your company.
Don’t fall into the small pot trap
According to the Department for Work and Pensions, the average person will have 11 jobs in their lifetime so keeping track of various workplace pensions may become difficult over time.
Even worse, charges and fees can mean that your small pots get eroded over time, causing significant damage to your retirement.
Savova says: “The government has introduced new rules where your pension can’t be eroded beyond £100, but even by dropping to that level, you could lose a substantial chunk of your savings.
“Excessive admin fees sound small, but if you have a small pension, then they tend to eat up a lot of it and the investment performance can never recover the fee, and so the balance just keeps going down.”
For this reason some savers choose to move all their pensions into one pot in order to make their fund easier to manage and reduce the cost of fees.
Extra advice for women
Statistically, women have smaller retirement funds than men. There are lots of reasons for this, from the gender pay gap generally, to the fact that women often have multiple small jobs.
Savova urges women to make sure they stay protected, particularly if they have caring responsibilities, whether that’s for children or for older family members.
She says: “What tends to happen is that women become the unpaid caretaker and therefore the realm of finances that they tend to occupy is saving for the daily shop, or holiday finance, whereas and then the man tends to focus on long term savings.
“And this is just a dynamic that plays out because the man will be more likely to be automatically enrolled, is more likely to be on a slightly higher salary and therefore, he ends up taking care of the pension.
“Really, the pension should be treated as a joint asset. And that means that if you are staying home and you are taking care of a child, then your partner should really be putting as much money into your pension as they are putting into theirs.”
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