When to start saving for retirement

When to start saving for retirement

The earlier you start saving for your retirement – or adding to your savings – the better. 

Delaying it could cost you when you retire. Have a look at the charts below.

The first chart shows the potential monthly pension you would get at age 65 by investing £200 gross each month, starting at various ages. Clearly the younger you start, the bigger the savings you can build up.

The second chart shows the savings that you need to have in order to generate a sum of £10,000 each year.  Once again you can see that the older you are the more you need to save to achieve the same end result.

Bar charts showing the pension you can achieve by 65 depending on the age you start investing
These aren’t predictions of what you might get by saving and you could get more or less than is shown, but they’re based on the assumptions below.

•    1.5% Annual Management Charge reducing to 1% after 10 years
•    Longer life expectancy for women than men
•    Opting for pension income drawdown
•    7% annual growth rate
•    Retirement age of 65

How much do you need to save?

There’s a lot to think about. Such as how much can you afford to save? This depends on your circumstances, like the job you do and the cost of living. But you’ll probably have to save more than you’d think. Inflation, interest rates, variations in investment returns and the effect of compounding will all determine how much your savings are worth when you retire. Let’s say prices rise by 3% a year. After 20 years it’ll cost you £18,000 to buy things that now cost £10,000.

It’s also worth thinking carefully about life expectancy. How many years any of us will live after retiring is anybody’s guess, but thanks to factors such as better healthcare and lifestyle education, average life expectancies are rising rapidly in the UK. In particular, our life expectancy at retirement has risen over the last 35 years, potentially increasing the time we spend drawing a pension.

A man reaching 65 this year can now expect to live, on average, for another 18 years according to the Office for National Statistics (ONS), compared to 6 years for those reaching 65 in 1980. Women at 65 today can expect to live for another 21 years, compared to 12 years in 1980.

Life expectancy 2012 - 2014

​At birth
​At age 65
​Males Females​ ​Males Females​
​UK ​78.9 ​82.7 ​18.4 ​20.9
​England ​79.4 ​83.1 ​18.6 ​21.1
​Wales ​78.3 ​82.3 ​18.0 ​20.5
​Scotland ​76.8 ​80.9 ​17.3 ​19.6
​N. Ireland
​78.0 ​82.3 ​18.1 ​20.5
Source: Office for National Statistics

When saving for retirement, people often underestimate how long they’re likely to live. In the same way, they misjudge the size of the pension pot they need. As life expectancy continues to rise, the need to plan for your retirement grows.

How a SIPP could help

You should contribute to a workplace pension, which your employer must offer by 2018. Your employer will have to contribute to your workplace pension, and you should take advantage of whatever workplace scheme is available to you.  However, if you want to save more, you’re an experienced investor with the time and ability to manage your own investments and you want to choose from a wide range of investments including shares and ETFs, you might consider also contributing to a Self Invested Personal Pension (SIPP). This is a flexible way to save for your retirement that offers tax advantages you’d expect from a traditional pension but it also gives you flexibility over the range of investments you can hold and allows you to take full advantage of the new flexibility around how you take your pension benefits. 

Remember, though, you can’t withdraw anything before age 55 (rising to 57 from 2028 and possibly higher later), so you should have other savings arrangements that you can access easily to meet your shorter-term financial needs.

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  • Please be aware that tax rules can change and the value of tax relief will depend on your individual circumstances.
  • SIPPs are not for everyone. You need to have the necessary skills to invest your own pension fund as the value of investments can fluctuate and you could get back less than you invested.
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