Coleridge Wealth: A slow start can be costly

James Cridland.

James Cridland. - Credit: Archant

Planning for retirement is just one area in which, with the benefit of hindsight, many people wish they had taken action earlier, says finance expert James Cridland, director of North Somerset company Coleridge Wealth Management.

Research from Aegon found that 51 per cent of workers wish they had started saving for a pension earlier, or regret having taken a break from saving; 14 per cent of workers said their biggest regret was not making a financial plan for their pension.

The biggest regret of those retired was, for 38 per cent of respondents, putting off making a savings decision; for 18 per cent it was poor planning.

On the positive side, 42 per cent of those surveyed said their best savings decision was joining their workplace pension or saving into a personal pension; 19 per cent felt their best pensions decision was to save for retirement from an early age.1

Indeed, an earlier study by Prudential found two in five pensioners regret retirement-planning mistakes which have left them struggling financially. Nearly one in five said that they didn’t save enough for retirement, and 15 per cent regret not starting to save earlier in their working lives.2

Save for tomorrow

Understandably, many of us still have misgivings about locking our money away for decades – especially if we have more immediate calls on our income. Nevertheless, if we’re serious about planning for the future, we need to put away surplus income today, since doing so funds our lifestyles tomorrow.

Most Read

Pension contributions attract tax relief on the way in and they accumulate capital gains free of tax once inside. When you access your pension savings, the first 25 per cent is normally tax-free. While you cannot draw on the funds until your 55th birthday, this does protect your pot against the temptation to tap into it until then.

Getting off the mark

How much pension income you need in retirement will be determined by many factors, including your health, your living expenses and your desired lifestyle. Unfortunately, there’s no one-size-fits-all answer. However, as stated in August 2019 by the Office for National Statistics, the average earnings in the UK are £29,588 per year; so a pension income of around £20,000 may be on average the minimum requirement.

Therefore, even if you qualify for the full single-tier state pension of £9,110 a year, you would be looking to find at least £11,000 a year from your other pensions. Achieving this, however, can be very challenging for those on low incomes, or those with unpredictable earnings – but especially for those who delay saving.

Assuming that the fund would be used to purchase an annuity, someone in their mid-20s who starts saving into a defined contribution (money purchase) pension today would need to save around £297 a month to achieve an income of £12,000 by the time they reach state pension age. Someone who delays until their mid-30s would need to put away £420 a month; and a 45-year-old who hasn’t started a pension would need to start saving around £714 a month.3

These figures are only examples and are not guaranteed: they are not minimum or maximum amounts. The amount achieved would depend on how the investment grew and on the tax treatment of the investment. The amount achieved could be more or less than this.

Playing catch-up

The sooner we start, the more choices we have later. The power of compound returns, or gains on gains, means 10 or 20 years can make a big difference. However, you should never think that it’s too late to start saving, or that you can’t catch up. There are real opportunities to make up lost ground if you have the available means and allowances.

You can put as much as you want into your defined contribution pension, but you’ll only get tax relief on pension contributions up to £40,000 each year, or 100 per cent of your earnings if lower. (High earners have a reduced, ‘tapered’, annual allowance.) Pension providers generally claim tax relief for you (called ‘relief at source’) at a rate of 20 per cent and add it to your pension pot, which actually creates a 25 per cent uplift in the sum; therefore £80 becomes £100. Higher rate taxpayers can claim an extra 20 per cent via their annual tax return; a £40,000 contribution could effectively cost a higher rate taxpayer just £24,000.

Moreover, you can make use of allowances from the three previous tax years if these haven’t been utilised.

In any case, the fact remains that the best way to secure a comfortable retirement is to save as much as possible as early as possible in your working life, and take financial advice. The longer you delay saving, the harder it will be to build the kind of fund that will see you through retirement.

¹ Aegon study of 657 working adults over the age of 18 and 227 retired people, February 2018

² Prudential, ‘Regrets? They’ve got a few – but pensioners are happy in retirement’, April 2016

³ Nutmeg, accessed 6 September 2019; with an annual return assumption of five per cent

To receive a complimentary guide covering wealth management, retirement planning or Inheritance Tax planning, contact Coleridge Wealth Management on 01275 430024 or email