Young people who put off saving for a pension until they reach middle age could lose up to £100,000 in employer pension contributions and tax relief, a delay that could cost them as much as £665,000 by the time they retire, new research by pension consultants Barnett Waddingham reveals.
The research, which explores the financial implications for young people who do not enrol into a pension scheme until the age of 40, compared with workers who started saving at 25 years of age, across three defined contribution pension schemes with different levels of contribution, has been produced to highlight the importance of saving early.
According to the research a 25 year old, earning £25,000 pa, who delays joining a generous workplace pension scheme until they are 40 years old could miss out on £97,900 of employer contributions, tax relief and estimated investment returns in addition to their own contributions (see Case Study 3). An employee who does not sign up to a mid-range scheme would lose at least £59,000 (Case Study 2). Even a worker who did not join a scheme that offers the minimum contribution recommended by the government would miss out on £27,100 (Case Study 1).
Barnett Waddingham’s findings also show that a worker who had not saved into a pension scheme until 40 could halve the value of their potential pension fund and subsequent income on retirement. While those saving from 25 years of age into a generous scheme could amass a pension fund of £1,275,400 at age 70, those saving at 40 would, in the same scenario, have a pension pot of £608,200 – more than 50% lower, with a £667,200 loss in savings. Someone saving into a mid-range scheme would lose £444,800 in savings, while someone on a minimum contribution scheme would lose £221,500.
At current annuity rates this fifteen year delay, for someone who had access to a generous scheme, would dramatically slash annual pension income, from a potential £86,000 to £41,000. For workers with lower contributions and investment returns, annual income could fall from £28,500 to £13,600, and from £57,300 to £27,300 for a mid-range scheme.
Commenting on the findings, Barnett Waddingham consultant Malcolm McLean said:
“There is an understandable tendency for many young people, especially in these challenging economic times, to want to concentrate on their more immediate financial needs and not commit themselves to investing their hard earned money into any sort of long-term pension plan, the benefits of which they are unlikely to see for perhaps 40 years or more.
"Nevertheless it is important that they have an eye on the long-term and don’t look a gift horse in the mouth. A workplace pension scheme is effectively that - an opportunity to receive “free money” in return for a personal contribution of a, sometimes relatively small, designated amount. Not to join such a scheme where available is tantamount to turning away wages.
“This research shows just how much a young person could lose by delaying the start of their pension plan by fifteen years. The message that many young people should take on board as the Government’s programme of auto-enrolment continues is that this is an opportunity to receive some tangible help in planning a better future for themselves.
“Starting early is the key. The state pension on its own is unlikely to sustain future generations beyond a bare minimum and building up a sizable private pension pot takes many years. Young people today can expect much longer in retirement than their forefathers, but with better health prospects and a decent standard of living those could be good years. The sooner they start planning and preparing for that important stage of their lives the better.”
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