The short answer to this question is ‘as much as you can, as soon as you can.’
The reality is most people are not saving enough towards their retirement. This is arguably because the cost of living is enough of a burden without thinking about saving. However, it is also because people simply don’t understand (or don’t want to think about) what is required to ensure a financially secure retirement.
So, if you’re in your 20s or 30s, what can you do to work towards having enough funds in your pension pot when it comes to retirement?
As a brief reminder, the basic premise of a pension is that you are investing small amounts monthly, on a tax-advantaged basis.
Note: the below calculations are based on an Isle of Man resident who has met the criteria to receive the Manx State Pension (at least 10 qualifying years of National Insurance contributions or credits).
Retirement goals
Let’s assume you’re aiming to receive £23,300 income per year in retirement (the same figure referenced in this article), which is estimated to be enough for a foreign holiday once a year. Manx State Pension provides £251.30 per week (£13,067 per year), resulting in a shortfall to achieve the aforementioned £23,300 of just over £10,000 per year.
A further consideration is should you wish to stop working before your state pension comes into play, you’d need to find £23,300 per year until you get to 68, plus an extra £10,000 per year from then onwards to top up your state pension.
How much do I need to save?
This depends on a number of things, such as when you want to start taking your pension, how much your invested savings will grow by, what the inflation rate will be between now and retirement and most importantly, how early you wish to start drawing from your pension pot.
Using Boal & Co’s extremely talented actuarial team, and making some assumptions* we have come up with the following, based on someone who is currently aged 25:
Example 1. Retiring at state pension age (68) with a pension of £23,300 per year
Someone commencing contributions into a pension plan at 25 could achieve a pension of £23,300 by age 68 by starting off with contributions of only £134.07 per month into a pension*. As the contributions would gain tax relief, the actual cost for a 21% taxpayer would be just £105.91.
Example 2. Retiring at age 60 with a pension of £23,300 per year
To achieve the same outcome as above but retiring at age 60 (eight years earlier) would cost an additional £207.58 per month in pension contributions (£163.99 per month after tax relief).
In summary
- Retiring with £23,300 per year at age 68 could be achieved by starting with saving £134.07* (after tax relief) per month from age 25
- Retiring at 60 with £23,300 per year could be achieved by starting with saving £269.90* (after tax relief) per month from age 25
Ultimately, the more you save and the younger you start, the better off you will be and the earlier you can stop working. However, we would never want to imply that pension saving is that straightforward and would always recommend seeking independent financial advice from a professional adviser.
Additional considerations
The growth of your pension savings will depend largely on the net performance (after fees) of the investments you choose to invest your pension fund in.
However, the following factors are also important considerations:
- The earlier you start contributing into a pension plan, the less you need to save each month to meet your targets. If you start in your 20s, this gives you 40+ years to benefit from compound interest (earning further interest on your investment growth).
- If your workplace pension scheme offers employer matched pension contributions, you may instantly double the contributions into your pension plan. Additionally, a small increase in your contributions may be matched - and the sooner you make the increase, the more you benefit.
- If you are in a couple at retirement, your target pension amount can be lower as you will have numerous shared costs.
Summary - what do I need to do?
If you’re in your 20s or 30s, preparing for retirement is probably not on your priority list.
However, taking action now, no matter how small, will make a difference to not only when you will be able to retire, but how your quality of life will be, when you eventually do so.
If you have a pension plan, it’s worth reviewing how much you are currently paying into it. If your employer is matching your contributions, you could quite easily boost your annual saving quite significantly without making too much of a dent to your pay packet (perhaps one less takeaway per month?)
If you don’t currently have a pension plan, speak to your employer, your adviser (if you have one) or come straight to us and we’ll help you to get started.
*Assumes annual investment growth of 5% (net of charges), annual inflation of 2.5% and annual contribution increase of 2.5%.
This article has been written in general terms and does not constitute investment advice. Investments can go down as well as up. Professional advice from an independent financial adviser should always be sought for your specific scenario.
You may also enjoy:
Top Five Reasons To Start Your Pension Young
Sensible investing for your future – it’s easier than you think
Conor Boal
Client Relations - Corporate Pensions
