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The exact age you need to start taking your pension seriously – or risk a poor retirement

Pension Guide
Pension Guide

By the time you get to your mid-30s, things may have started to fall into place, both personally and professionally.

Milestones such as buying a home, having a child or settling down with a partner may have been reached. It can also be the time you start to feel better off.

If you are lucky enough to be able to save – and feel motivated to do so – this is a sensible moment to capitalise on it. More specifically, it is the time to focus on planning for your retirement.

New analysis from Standard Life, the insurer, suggests that 36 is the “exact” age at which you need to start to take your pension seriously – or risk having a poor retirement. We take a closer look.

Retirement countdown begins at 36

According to the research, 36 marks a “turning point” at which we start to feel more “sorted” – and is the moment at which we look to the future and begin active planning for our retirement.

By this time you’ve probably had more than a decade in the workforce and may have half an eye on life after work. But is focusing on pensions once you reach the age of 36 early enough to ensure a comfortable retirement?

A lot depends on how you’ve been saving up to this point – and how you plan to do so in future.

Crucially, with the shift from “defined benefit” or final salary pensions, which offer a guaranteed retirement income, to “defined contribution” plans, which do not, the onus is firmly on younger workers to take responsibility for their retirement plans.

Standard Life’s Sangita Chawla said: “With defined benefit pensions fading out, future retirees must take matters into their own hands. For those doing so, there are a number of headwinds such as high housing costs and a cost of living crisis, with added challenges such as student tuition fees to contend with.

“It’s likely many will face trade-offs when it comes to meeting today’s costs versus planning for retirement.”

What about auto-enrolment?

Before turning 36 less than a quarter of people pay more than the minimum auto-enrolment contributions of 8pc of earnings into their pension, according to Standard Life. But by 36 the figure jumps to 35pc.

Helen Morrissey from Hargreaves Lansdown, the investment company, said: “Auto-enrolment enables people to start saving into a workplace pension early, and this steady drip-feed of contributions – alongside long-term investment growth – enables people to build up a decent retirement pot.”

But it is important to think about what you want your retirement to look like. Ms Morrissey added: “People have very different expectations, and this means the amount you need to save can vary widely.”

The Pensions and Lifetime Savings Association, a trade body, defines a “comfortable” retirement as one where you can take overseas holidays for three weeks a year, run a car and enjoy treats such as theatre trips.

The PLSA estimates that such a lifestyle would currently cost a single person £37,300 a year.

So, on top of the full new state pension of £10,600 a year, you’d need a private annual income of £26,700. For a couple the figure from the PLSA is £54,500 a year.

To achieve this level, a couple who shared costs and each received the full new state pension would need to accumulate a retirement pot of £328,000 each if they turned their savings into an income by buying an annuity, the PLSA said.

Bear in mind that this is in today’s figures and the impact of inflation means future retirees will need much more. In short, you’re going to need to save hard.

It pays to make a contribution boost in your mid-30s

If you do decide to top up your pension contributions at 36, just how big a difference will it actually make? We got Hargreaves Lansdown to do the calculations.

Let’s take the example of Joe Bloggs, who began working full-time with a salary of £25,000 a year and who made the minimum auto-enrolment contributions of 8pc (5pc employee, 3pc employer) from age 22 into a workplace pension.

He could end up with a pot of around £500,000 by the time he turns 68. This assumes 5pc annual investment growth, 3.5pc salary growth per year and annual investment costs of 1pc.

Figures are not reduced to take inflation into account. If, however, Mr Bloggs increased his contributions by 3 percentage points to 11pc from the age of 36, this could give him a much healthier pot of £630,000 by the age of 68 – meaning he ends up with £130,000 more.

Ms Morrissey said: “This demonstrates that increasing pension saving in your 30s could give your pension pot a decent boost when you stop working, helping you achieve that ‘comfortable’ retirement.”

Don’t forget the power of compound interest

It’s also important to remember that early pension savings are very powerful because they benefit from compounded returns.

Gary Smith from the wealth manager Evelyn Partners said: “These ‘returns on returns’ can exponentially increase a pension pot through the decades to come. With this in mind, with more than 30 years to go to state pension age, 36 is a reasonable age to start thinking more seriously about pension savings.”

But he acknowledged that there might be many financial demands on workers in their 30s.

“Things such as housing, travel and childcare, on top of rising living costs, are likely to drain much available income. For many, these costs will make it difficult to bump up pension contributions above the 8pc auto-enrolment minimum,” he said.

What if you can’t top up until later in life?

The good news is that even if you can’t increase the amount you pay in until you reach 40, or even 50, all is not lost.

Ms Morrissey said: “Life can get in the way, bringing unexpected expenses with it. It’s important not to worry if you haven’t been able to boost your contributions yet.

“It’s never too late to make a difference. Increasing your contributions whenever you can will have an impact on how much you end up with in retirement.”

If you wait until 40 to boost contributions

If our hypothetical saver Joe Bloggs had been making the minimum 8pc auto-enrolment contributions until 40 and then boosted them by 3 percentage points to 11pc, he would end up with £609,000 by age 68. If he increased the boost to 4 percentage points at 40, it would give him £645,000.

If you wait until 45 to boost contributions

If Mr Bloggs were able to increase his contributions by 3 percentage points when he turned 45, this would leave him with £588,000 at 68. If he raised the uplift to 4 percentage points, he would get £617,000.

If you wait until 50 to boost contributions

Even if Mr Bloggs waited until 50, a 3 percentage point boost would leave him with £568,000 and a 4 percentage point boost would get him £590,000.

It’s never too late

All this demonstrates that for those in a position to do so, proactively topping up contributions, or making one-off payments, could prove to be a valuable gift to your future self.

Make use of tools

If you want to find out more about the impact of increased pension contributions, it’s worth checking out online calculators. These tools can also help you see how much income you could receive via an annuity or income drawdown when you retire.

Your workplace pension provider or Sipp company will usually have such tools available.

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