40 and pension-less? It’s not too late

Pensions

Alistair Hardie

20th February 2014 at 4:20pm

Pensions are a hot topic at the moment. We’ve got all the talk of a ‘savings gap’ with an estimated 11 million people not saving enough.  And that’s driven the launch of auto-enrolment with employees being enrolled into company pension schemes.

So what if you’ve reached 40 and not started a pension or are just being enrolled into one for the first time?  Is it too late?

Possible pension pot of £187,000 for just over £100 a month…

Well, after some number-crunching, I found that with pension savings of around £100 a month you might end up with a useful pension pot of around £187,000.

Here’s the science…

Assume you’re 40 and earn just over £30,000.  You start a pension and between you and your employer pay in 8% of your salary each month until you retire, age 67[1].

I’ve chosen 8% of salary as this is in line with what the government has set as a minimum pension contribution by the year 2018.  It’s part of a new law to help people save more for retirement.  Employers will be required to contribute at least 3% of this, meaning employees pay 5%.[2]

Plus remember, in most cases the government tops-up your pension payments, adding £20 to your pension for every £80 you put in.

At retirement, your pension could be worth in the region of £187,000.  While an annual income of £12,000 may not seem much, by age 67 you may be mortgage-free.  What’s more, if you’re in a household where two of you work and save into a pension or have other investments, you could be looking to double this or more. This assumes your salary increases with inflation at 2.5% and you get 4.5% investment growth on your pension savings. That pension pot is the equivalent of about £96,000 today.

You can take 25% of your pension pot as a tax free lump sum – in this case just under £47,000, the equivalent of £24,000 in today’s money. The remainder could give you a guaranteed annual income equivalent to approximately £4,500 [3] today (assuming you buy an annuity).  Add this to your state pension[4] and your annual pension income would be in the region of £12,000 in today’s money.

Will £12,000 be enough come the day?

While an annual income of £12,000 may not seem much, by age 67 you may be mortgage-free.  What’s more, if you’re in a household where two of you work and save into a pension or have other investments, you could be looking to double this or more.

Don’t forget your State Pension

One final point – always remember to include your State Pension when calculating your total retirement income – it can make a significant difference.

Still game

So, is it too late to start saving into a pension at 40?  In my opinion the answer is no. You are likely to be working for another 20 years or more – which is 20 years’ worth of investing to give you a better retirement.  Always remember to include your State Pension when calculating your total retirement income – it can make a significant difference. The numbers still stack in your favour and you’re still in the game, but it’s important to act now.

The information in this blog is not financial advice.  A personal pension is an investment.  Its value can go up or down and may be worth less than you paid in.

[1] The most likely state pension age for the majority of UK adults based on today’s rules

[2] For information on the government’s new law for employers to automatically enrol workers into a pension see The Pension Regulator’s website  For more information on pensions and the tax benefits they provide see the Pension Advisory Service’s website.

[3] Based on today’s annuity rates

[4] Based on the flat rate state pension of £144 per week increasing with inflation.  For information on your state pension entitlement see State Pension calculator – GOV.UK

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