The impact of missed contributions and fund growth mean that a 22-year-old starting work on the median UK salary today, that then immediately begins making pension contributions would have a pension pot close to £40,000 larger at retirement age than an identical saver who chooses not to contribute until in their 30s.
The latest analysis from Purely Pensions shows the importance of young people contributing towards their retirement savings from an early age. This comes as Royal London found that 40% of millennials have chosen to pause or stop their pension contributions because of Covid-19.
Assuming that a person begins work at 22 with the median salary (averaged between men and women) and makes contributions of 10% of their salary (in conjunction with their employer), pays product charges of 0.4%; and achieves average fund growth of 4% annually, they would reach retirement age (68) with a pension pot valued at £170,733. This also takes into consideration a 2.5% annual inflation rate.
However, if the same individual were to wait until age 27 to begin making contributions, their pension pot would be just £149,679. Someone starting contributions under the same conditions but at age 32 would reach retirement age (68) with just £131,786 – nearly £40,000 less than a person beginning at age 22.
Matthew Amesbury, Head of Pension Advice, Purely Pensions (a AHR business), said: “The negative financial impact of the crisis has led many to seek ways of maximizing their take home pay and for a large minority of younger people, it seems they have chosen to stop their pension contributions as a result.
“However, people who fail to begin saving towards their retirement from a young age significantly miss out on the benefits of compounding interest and long-term growth. The impact this can have by the time someone reaches retirement is staggering and it could even worsen their later life prospects. Without knowing it, failing to save for retirement in early life could actually be leaving these people poorer in their older years. It may also put individuals under pressure to choose riskier investment options in later life to make up the difference.
“The benefits of pension tax relief and long-term saving significantly outweigh the short-term perks of increasing a person’s take-home pay. Despite the difficulties of the crisis, people should still think first before making changes to their retirement savings and speaking with an adviser is always a good place to start.”
|
