BLOG: Hitting 40 without a pension? It’s not too late

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It's not too late to build-up some savings to boost your retirement plans, writes Julie Hutchison of Standard Life.

The run-up to a ‘big birthday’ can sometimes feel a bit daunting. It can also prompt us to reflect, as we look back on some great memories and possibly a few regrets too. We know from our research that one of the biggest “financial regrets” for people as they get older, is not starting to pay into a pension sooner. If this is one of the things on your mind, don’t panic, it’s not too late to fix things.

New rules for company pensions mean that if you aren’t already a member of an employer’s pension scheme, you might be automatically enrolled into one in the next year or two. You could opt out if you wanted to, but there are several reasons why you may not want to do that. Even if you can only spare around £80 a month, a great deal is possible. If you pay that into a pension, then in most cases the government tops-up your pension payments, adding £20 to your pension for every £80 you put in – that’s the magic of tax relief. If you join a workplace scheme, then your employer will top that up further, by paying into your pension too.

A case study that could be you

Let’s assume you are earning just over £30,000 a year and at age 40 you do join your company pension scheme. Between you and your employer, you start paying a total of 8 per cent of your salary towards your retirement each month until you retire, age 67.

I’ve chosen 8 per cent of salary as this is in line with what the government has set as a minimum pension contribution by the year 2018. It’s part of a new law that aims to help people save more for their retirement. Employers will be required to contribute at least 3 per cent of this, meaning employees pay 5 per cent.

I’ve done some number crunching and at retirement, your pension could be worth in the region of £187,000. This assumes your salary increases with inflation at 2.5 per cent each year and you get 4.5 per cent investment growth on your pension savings each year. That future pension pot is the equivalent of about a £96,000 pot in today’s money.

You can take 25 per cent of your pension pot as a tax free lump sum when you come to retire – in this case just under £47,000 (the equivalent of £24,000 in today’s money). The remainder could give you a guaranteed annual income equivalent to approximately £4,500 today (assuming you buy an annuity). Add this to your state pension and your annual pension income would be in the region of £12,000 in today’s money.

You don’t have to buy an annuity, I’ve just used this to give you an indication of the kind of guaranteed income your could expect. Following this year’s Budget it is likely that more people than ever will choose to keep their pension fund invested when they retire and rather than use it to buy an annuity, they will take their income from their retirement pot each year. They key there will be ensuring it remains invested in the right placed and continues to grow.

What if I’m not an employee?

If you’re self-employed and not an employee, you might be wondering happens if you don’t have access to a company pension? Unfortunately that does mean you need to make your own arrangements, by saving into a personal pension, or perhaps a self invested personal pension (SIPP). And you won’t have the benefit of any contributions from an employer, so you’ll have to pay more into your pension yourself each year, to get the same income when you retire – something everyone should factor in to the cost of being self-employed.

Will £12,000 be enough income?

While an annual income of £12,000 may not seem much, by age 67 you may be mortgage-free. And if you’re in a household where two of you work and save into a pension or have other investments, you could be looking to double this or more.

So, it’s not too late to build-up some savings to boost your retirement plans – start the habit, even if it is with a small amount of money initially. The trick is to stick with it, so that when your 70th birthday comes around, you can afford to celebrate it the way you’d like to.

Julie Hutchison is head of customer affairs at Standard Life

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