Member Article

Start early to boost your pension pot

Starting a pension plan in your 20s can make a huge difference to your quality of life in retirement.

A study by Sussex-based Carpenter Box Financial Advisers (CBFA), coinciding with Pensions Awareness Week (11th – 15th September), shows how starting a pension plan at age 25 with a £300 monthly contribution could potentially create a pension pot of more than £700,000 40 years later.

In contrast, making the same level of contributions from age 45 (using the same baseline assumptions) would result in a potential fund of around £180,000.

As Roy Thompson, Partner, Head of Financial Services at Carpenter Box Financial Advisers explains: “Retirement planning tends to be a low priority for younger people because there are lots of life choices competing for available cash, but if they can commit to regular pension contributions in their 20s, the effect of tax relief combined with compound gains can potentially be huge.”

The CBFA example assumes a £300 monthly contribution from age 25, which automatically receives a £75 tax relief boost from HMRC*. Extrapolating this to include a 3% annual payment increase and 4.5% compound return** would result in a pension pot of £736,247 at age 65, even though actual contributions total £303,309.

By comparison, where the start date is deferred to age 45, and all other aspects remain the same, the fund grows to £181,775, based on contributions of £114,949.

Says Roy: “There is, of course, a sizeable difference between the contributions made for 40 years and those made for 20 years. However, saving early can have dramatic effect on the outcome and size of the pot available beyond the contributions figure.

“How that money is used and the level of income it can provide will be dependent upon retirement planning choices made when you come to draw an income, but the message is very clear. The earlier you start, the benefit of regular savings, tax relief and compound investment returns over time is a huge lever to pull in creating good retirement outcomes.”

*. The Financial Conduct Authority do not regulate tax planning.

**. The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.

This was posted in Bdaily's Members' News section by Colin Bridgman .