‘First £1 is most important’. One simple pension mistake can ruin retirement

Morning Live: Advice on pensions and NI contributions

Often they do not realise what they’re getting wrong, until they wake up to the fact that retirement is just a few years away. By then it may be too late to make amends.

It takes a lifetime to plan a comfortable retirement and the earlier you start, the better your chances of building enough pension and other savings to enjoy your final years. Or at least, avoid constant money worries.

New research from Hargreaves Lansdown highlights the UK’s biggest pensions regret. It shows that one in four approaching retirement wish they had started to save in a pension much earlier.

The second biggest regret is failing to make large enough contributions.

The first pound you save in a pension or tax-free Isa is the most valuable of all, because it has the longest time to compound and grow.

Delaying for just a few years can be incredibly costly.

If somebody started investing a relatively modest sum of £100 a month at age 25 in a pension or tax-free Stocks and Shares Isa, their contributions could be worth a staggering £509,393 by age 65.

This assumes they increase their payments by five percent a year to keep up with inflation and their money grows at an average rate of seven percent a year, broadly in line with long-term stock market growth.

If they waited 10 years and only started saving their £100 a month at age 35 they would have just £211,238 at 65.

That’s almost £300,000 less.

This calculation also assumes they increase their contributions by five percent a year and their money grows by seven percent a year.

If they didn’t start saving until age 45, their contributions would grow to just £78,092. They have saved for half as long as the 35-year-old (20 years instead of 40 years) but ended up with just a quarter of the pension.

Yet many fail to realise the benefits of starting early. 

It doesn’t help that younger people typically have more pressing financial priorities, such as raising a family, paying off student debt or buying a home.

It’s a huge burden but they have to keep an eye on the long term, too.

Young people are keen to retire early but often fail to understand the scale of the challenge involved in saving enough money to quit work.

Two in five adults under 35 expect to retire at age 60, according to new research from mutual Royal London, but its pensions expert Clare Moffat said this is highly optimistic. “They won’t qualify for a state pension until much later, and that poses serious questions about how they will fund the lifestyle they want.”

Seven in 10 under-35s had no idea how much retirement income they would need but when pressed they named an average figure of £1,086 a month, which would only cover the bare essentials, Moffat said.

At least young people have time on their side and most will build some pension wealth under the auto-enrolment workplace pension scheme, she added.

Making amends for starting late is tougher for those closer to retirement but there are still things they can do, said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. “Even small increases to your contributions can make a big difference to what you ultimately end up with.”

Someone aged 45 earning £34,000 per year with a pension worth £60,000 could up that to £160,000 by 68 if they continue contributing at auto-enrolment minimum levels, Morrissey said. “If they paid in another £50 per month, they would see that grow to £180,000. A £100 monthly contribution could lift it to £198,000.”

Many company pension schemes will pay more into your pot if you increase your own contribution first. “Check whether your employer offers matching contributions and take advantage if you can.”

Workers whose retirement is less than 10 years away will have to go flat out to build up their pension savings in the limited time available.

Somebody who could afford to put away £500 a month could still build up a retirement pot worth £108,580. Again, this assumes they increase their contribution by five percent a year and it grows at seven percent a year.

It helps that everyone can claim tax relief on pension contributions. As a result, each £100 of pensions costs a basic rate taxpayer £80 and a higher rate taxpayer just £60.

By failing to start saving enough people are effectively turning down free money from HM Revenue & Customs, which is something else to regret later.

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