According to Fidelity International, starting pension contributions in your 40s can help you build up a worthwhile pension for retirement.
For those affected by the recent rise in the state pension age, it’s not too late to start saving for retirement, says Ed Monk, associate director of personal investing at Fidelity International.
The government recently announced that for those in their early to mid-forties will now have to wait until they are 68 years old to retire. According to Monk, those affected who have only a small or even no private pension pot still have time to build up a worthwhile pension for retirement.
Fidelity took the hypothetical example of a 45-year-old with no pension savings who earns the current average salary for his age group (£31,122) a year. Between the age of 45 and the new retirement age of 68, he or she still has time to build up a pension pot of £116,305.
The calculations are based on contributions of 5% of salary and employer’s contributions of 3%, with annual salary rises of 3% and the pension pot growing at 5% a year.
This would translate into a monthly contribution to a pension scheme starting at £168.31 per month. However, with tax relief and employee contributions taken into account, the retiree would need to contribute only £84.16 of their monthly pay packet.
This would afford the hypothetical retiree an annual income of £4,701 per year, if they withdrew at a rate of 3.5% per year, according to Monk. With the state pension predicted to be at around £16,000 per year (assuming the state pension continues to grow by 3% a year), this would provide them with a 25% boost in their yearly retirement income.
‘Even starting today or in the near future, you can use your workplace pension to get free money from your employer, tax relief and generate a pot that is worth having,’ said Monk.This hypothetical retirement annual income is higher than the current expected retirement income for those retiring in 2017.
According to Prudential research looking at the cohort of people retiring in 2017, the so-called Class of 2017 have an average expected retirement income of £18,100 a year. However, that’s without considering interim inflation. While the average expected income for retirees has yet to recover to 2008 levels, 2017’s figure is up from the 2013 low of £15,3000.
Holding back pension income growth over the past ten years, however, has been the historic low interest rates. The proportion of pension income derived from investment and savings have only increased by 8% over the past 10 years in comparison with around 40% from the amount paid by private and occupation pensions.
This article was originally published on our sister website Money Observer.