Every little counts towards your pension nest egg

Eggs in the basket representing a pension

Pensions

Alistair Hardie

17th April 2014 at 2:45pm

This Easter, why not do something to grow your nest egg?

If, like many people, you have a hefty mortgage and expensive child care bills to pay, pension payments may have fallen down your list of priorities.

However, you may be surprised what a difference saving just a small amount of your salary into a pension each month can make. It will help to build towards the kind of life you want in the years to come.

Let’s look at some numbers

Assume you are 40 and started your pension at 26 when you earned approximately £20,000. Between you and your employer you have paid in 8% of your salary each month and continue to do so until you retire, age 671. You may be surprised what a difference saving just a small amount of your salary into a pension each month can make. It will help to build towards the kind of life you want in the years to come.

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 as part of a new law to help workers save more for retirement. Employers will be required to contribute at least 3% of this, meaning employees pay 5%2

At retirement, your pension could be worth in the region of £290,0003.That’s a pension pot the equivalent of about £150,000 today.

You can take 25% of your pension value as a tax free lump sum – in this case £72,500, the equivalent of £37,000 today.  The remainder would give you a guaranteed income equivalent to approximately £7,250 a Year4 today. Add this to your State Pension5 and your annual pension income could be in the region of £14,700 a year in today’s money.

By age 67, you are likely to have paid off your mortgage, and any children are more likely to be self-sufficient, which means your costs are lower. If you are in a household where two of you work and save into a pension, you could be looking at considerably more than this. If you can contribute more than 8% it would be higher still.

Small but significant

Don’t undervalue the compounding effect of your pension payments over the years, even if you have to pay less when your outgoings are at a peak. The key point is – don’t undervalue the compounding effect of your pension payments over the years, even if you have to pay less when your outgoings are at a peak. A smaller pension contribution is often better than none at all – especially as, in most cases, the government tops up your pension payments by 20%.

In for a penny, in for a pound

So an important thing to remember this Easter is that to grow your nest egg you’ll need to get started and then keep going with your saving. You don’t always need to save big, just as much as you can and for as long as you can – it really will make a difference.

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The information in this blog and any responses to comments are 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 here  For more information on pensions and the tax benefits they provide see here.

3. This assumes salary increases at the rate of inflation – calculations use actual inflation rates to date and the inflation rate of 2.5% going forward.  A 5% growth rate is assumed for pension savings and an Annual Management Charge (AMC) of 1%.

4. Based on annuity rates at 15/4/2014

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