Start saving at 50, get a £1m pension
If you’ve left it late to start saving for retirement, don’t despair: you still have time to amass a large sum, says Sam Brodbeck
Not long ago, people in their 50s would be deemed to have left it too late to begin saving for retirement. Only a lifetime of pension contributions, allied with some investment growth, could produce a large enough pot to produce a viable income in later life, the conventional wisdom went.
But while “the magic of compound interest” does allow money put aside early to grow spectacularly, most young people do not have much spare cash to invest. Only in middle age can most workers begin to put serious sums aside.
Wages peak in the mid 40s and 50s (with men’s salaries reaching their high point about a decade later than women’s), according to official statistics.
Not only are incomes at or near their zenith in middle age, but two major costs of living are likely to have declined or ceased entirely. Mortgage terms are typically 25 years, meaning that many people who bought properties in their early 20s will be debt free by their 50s. Likewise, the cost of raising children dwindles once they embark on higher education courses funded by student loans.
In figures: the pension pot you can expect if you start at 50
Generous tax perks on pensions and Isa investments help even those who start to save from scratch at 50 to build a sizeable pot quickly.
A 50-year-old who earns, say, £70,000 a year could, starting from nothing, build up a pension worth £985,800 by 67 if they saved the maximum amount allowed each year. This figure, calculated for Telegraph
Money by pensions firm Old Mutual Wealth, assumes annual returns of 4pc after charges, a realistic rate given today’s investment market, and that the pensions “annual allowance” remains at its current level of £40,000 a year.
Even if annual returns were 75pc lower (at 1pc after charges) the pot would be worth £744,600 by 67.
Saving £40,000 a year may seem a tall order, but remember that this figure includes the tax relief that is applied to all pension savings. Someone who earns £70,000 a year would have to contribute only £27,000 from their own bank account to add £40,000 to their pension pot.
Someone who pays the basic rate of 20pc would have to spend £32,000 to save the same amount.
If saving through a personal pension, rather than a scheme operated by a company, higher-rate taxpayers will need to claim back the extra 20pc tax relief via a tax return. All pension savers receive relief at the basic rate automatically.
Under “automatic enrolment” rules, employers are required to save into a pension on your behalf. Many firms will match the money you save, capped at a proportion of salary; 5pc is a typical figure.
When it comes to taking money out of your pension in retirement, you can take 25pc as a tax-free lump sum and then pay income tax on further withdrawals, just as you would on any other income.
Isas – another main option for building up a pot of savings for retirement – work the other way round: you contribute out of your after-tax income but make withdrawals tax free. In the 2017-18 tax year you can put up to £20,000 into an Isa. Saving at that level for the same period as the pension example (17 years) with 4pc returns would produce a portfolio worth £372,295.
Since the “pension freedom” reforms were introduced in 2015, unspent pensions have been able to pass down the generations extremely tax efficiently. Isas, on the other hand, form part of your estate on death and will be subject to inheritance tax.
It can, therefore, make sense to hold a combination of pensions and Isas in retirement, spending the latter first if you want to maximise your legacy.
Is the decade before you retire the most important?
While some begin to invest only when they reach their 50s, millions of us have been squirrelling money away for decades.
New research produced by Aegon, the insurer, offers useful insight into the relative importance of investment
‘Remember that investment losses will have as big an impact as investment gains’
gains and your actual contributions for those who started early. In essence, investment returns become gradually more important, relative to the amount you save (see graphic, left).
If we look at someone who has saved for 40 years, the analysis found that the saver’s contributions accounted for the bulk of the portfolio’s value in the first 30 years – £83,484 against £71,836 from investment returns.
Yet in the last 10 years of investment, the opposite was true. During that period, investment returns were
far more important, accounting for £80,680 of the total, against £33,844 in contributions. However, as Aegon’s Nick Dixon pointed out: “It’s important to remember that investment losses will have as big an impact as investment gains.”
Mark Fawcett, the chief investment officer of Nest, the governmentbacked provider of workplace pensions, said: “This research debunks investment orthodoxy that says you should maximise risk when you’re young. What really matters are investment returns once you’ve built up a decent pot towards the end of your working life.”
Nest, which runs the savings of more than five million people, based its investment strategy around this concept. It takes relatively little investment risk for younger savers on the grounds that any missed returns can quickly be recovered once pot sizes are larger.