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.
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%.
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  today (assuming you buy an annuity). Add this to your state pension 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.
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.
 The most likely state pension age for the majority of UK adults based on today’s rules
 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.
 Based on today’s annuity rates