The £40k cost of starting your pension five years late – and how to fix it

Those who join the workforce now are more likely to save into a pension because of auto-enrolment rules, which automatically opt you into your workplace scheme to ensure you are saving for retirement. While people can opt out, 88% of employees stay in their scheme.

If you entered the workplace before 2012, joining your pension scheme was not automatic and there wasn’t necessarily the same push to encourage you. If you forgot to sign up, then you simply missed out or ended up delaying saving for retirement.

Those who delay entering their scheme could face a shortfall running into tens of thousands of pounds when they eventually stop working, based on analysis from financial services company Standard Life.

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Delaying by just five years can leave you £40,000 worse off in retirement, its analysis shows, while delaying by 10 years can leave you £74,000 worse off. Waiting until you are in your forties to focus on your pension – around 20 years after people typically first enter the workforce – could leave you with a whopping £127,700 less.

Given that a moderate retirement now costs a single person £31,700 per year, according to the latest figures from the Pension and Lifetime Savings Association, starting your pension five years late essentially robs you of more than a year’s worth of retirement funds.

Starting your pension in your forties, around twenty years late, essentially robs you of four years of retirement funds.

“Our calculations show that contributing to your pension from the very start of your career maximises the potential compound investment growth and can result in a much larger retirement pot,” said Dean Butler, managing director for retail direct at Standard Life.

“For those in a position to do so, consistently paying into a pension from as early an age as possible and topping up payments, especially in your 20s, 30s or early 40s, can make a massive difference over time.”

How much will a delay in pension savings cost?

Standard Life’s calculations show how much a typical saver could have in their pension pot by the time they turn 68 – which is the state pension age for those born on 6 April 1978 or after.

These calculations assume an employee enters the workplace aged 22, with a starting salary of £25,000 and annual wage growth of 3.5%.

Standard pension contribution amounts have also been assumed (5% employee contribution and 3% employer contribution), with 5% annual investment growth and an annual management charge of 0.75%. The figures account for 2% inflation.

The figures highlight the harmful impact of putting off saving for retirement.

Of course, not everyone’s career follows a linear path, meaning there are other periods in life when your pension could end up being neglected.

This could include periods when you were self-employed and not covered by auto-enrolment – see our first-person piece on the benefits of setting up a personal pension when self-employed.

A career break is another time when your retirement savings could take a hit. Analysis from consultancy Barnett Waddingham shows a two-year career break could leave you with £25,600 less in your pension.

Thankfully there are steps savers can take to help plug the gap.

How to boost your pension in later life

If you have gaps in your pension contributions, or started saving later in life, there are steps you can take to reduce the size of the shortfall.

1. If you are employed but have opted out of your workplace scheme, the first step you should take is to opt back in. That way, you will benefit from valuable employer contributions and pension tax relief on money you pay into your pension. Under auto-enrolment rules, employees who opted out of their pension scheme in the past are put back into it once every three years. They must actively opt out again if they still don’t want to be a member.
2. If you are self-employed and haven’t set up a personal pension, start one today. Starting small is better than paying nothing in at all. Setting up a direct debit means you won’t forget.
3. If you are now enrolled in a workplace pension but want to make up for lost time in your youth, consider upping your pension contributions above the standard minimum (5% employee, 3% employer). As a rule of thumb, retirement savings expert Scottish Widows recommends saving 12-15% of your salary into your pension to help achieve a comfortable retirement. This includes your personal contributions, plus your employer’s contributions and tax relief. You could also consider salary sacrifice as another tax-efficient option.
4. Make sure the fees you are paying are fair. Fees on workplace pensions are currently capped at 0.75%, but older funds could have higher charges, so it is important to check what you are paying. Remember to consider customer service and the investment offering as well as pure cost.
5. Consider your investment mix. Younger savers can afford to have more exposure to equities, which have a higher risk-return profile than less volatile assets like bonds. If you still have a long investment horizon ahead of you, make sure you aren’t de-risking too early.

Increasing your pension contributions is a particularly powerful move.

We plugged some numbers into Scottish Widows’ pension calculator and found that a 32-year-old earning £35,000 per year could boost their pension by £97,600 by the time they turn 68, simply by increasing their total pension contributions from 8% to 12% (including employer contributions).

This figure assumes annual investment growth of 5%, annual inflation of 2%, and annual wage growth of 3.5%.