POT LUCK
You could retire seven years early with easy pension trick – and you won’t notice you’re doing it
Plus watch our video to learn how you can track down lost pension pots worth £1,000s
AN easy pension trick could help you retire seven years early - and you won't even notice you're doing it.
Increasing your pension contributions by a very small amount over time could mean you get to finish working even sooner than planned.
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Topping up your pension contributions by just 5% alone could mean you retire seven years earlier.
Plus, you could end up with just under £25,000 more in your pot all thanks to - compound interest.
That's compared to saving the minimum auto-enrolment rates new analysis from Standard Life, part of Phoenix Group reveals.
Compound interest is where your money earns interest, growing the size of the pot, which then earns even more interest.
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This gradually snowballs over time, meaning the rewards for adding just a tiny bit extra each month can be huge.
Dean Butler, managing director for customers at Standard Life said: “There’s no one size fits all when it comes to people’s retirement goals, however consistently saving a relatively small amount more can increase your options and potentially buy you more retirement time.
"Pensions are both incredibly tax efficient and, over a number of years, allow for the potential of compound investment growth - meaning a little now can have a large future impact.
“Pensions aren’t always priority number one, particularly earlier in life, however increasing your contributions above the minimum levels is likely to pay off if you’re in a position to do so. Some employers match any contributions you make, giving your pot an even bigger boost.”
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Standard Life's research shows the long-term effect that changing pension contributions can have on retirement outcomes.
For example, someone who began working full-time with a salary of £25,000 per year and paid into a workplace pension from the age of 22, could amass a total retirement fund of £434,000, not adjusted for inflation, at the age of 66 – the current state pension age.
What are the different types of pensions?
This scenario sees the saver adding the workplace pension auto-enrolment minimum - 8% in total, contributing 5% themselves and their employer paying at least 3%.
If someone boosted their contribution by just 1% - a total of 6% - they would have the option of retiring a year sooner at 65 with an extra £26,000 in their pot up from £460,000.
If they increased their monthly contributions by 2% from the age of 22, they could amass a larger fund value of £453,000 by age 63 – gaining £19,000 and the option to retire three years earlier.
This would mean their contributions were made up of 7% from themselves, and 3% from their employer.
If the same worker chose to top up their contributions by 3% (total of 8% from employee) they would have built up a pot of £440,000 by the age of 61 - gaining £6,000.
By upping your contributions by 4% you could boost your pot by £17,000 and have the option to retire six years early.
Taking it up a notch again to 5% more - so a total of 10% employee contributions - would mean you could retire at age 59 with a total of £459,000 in your pot.
The example assumes 3.5% salary growth each year, and 5% a year investment growth.
Figures haven't been reduced to take inflation into effect, plus it assumes an annual Management Charge of 1%.
Of course, it's worth noting that the figures are an illustration and are not guaranteed - and earning limits are not applied.
Also do bear in mind that these figures are based on a worker who has upped their contributions since they were 22 - although making the move now would still have an impact on your retirement pot.
WHAT YOU NEED TO CONSIDER
While being able to retire as many as seven years early may sound like a great idea, it's important to be aware of the drawbacks.
Standard Life points out that contributing more and retiring earlier comes with a trade-off and people choosing to retire earlier might need to make similar retirement pots last longer and spread their savings over more years.
Plus, it does mean you'll be sacrificing more of your salary to put it towards your pension - definitely something to note if you're looking to increase contributions by as much as 5%.
Also bear in mind that if you retire earlier, you have to wait longer for the state pension to kick in - which is currently worth up to £11,500 a year.
It’s worth noting that the pot sizes illustrated here shouldn’t necessarily be seen as "ideal" – savings targets should take several factors into account, including people’s target standard of living in retirement and their other assets.
The Pensions and Lifetime Savings Association (PLSA) regularly looks at how much you'd need to have coming in each year to afford different levels of comfort after you retire.
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The PLSA's minimum retirement living standard covers all of a retiree’s basic needs as well as having some money left over for fun.
It includes a week’s staycation each year, eating out once a month, and some affordable leisure activities twice a week - but no car.
The PLSA says to afford this retirement you would need an annual budget of £14,400 as a single person, and £22,400 as a couple.
For a slightly more extravagant retirement, an individual will need an income of £31,300 a year, or £43,100 for a couple.
The moderate retirement living standard includes a two-week holiday in Europe each year and eating out a few times a month.
To live comfortably in retirement, the PLSA said an individual would need an income of £43,100 a year, and a couple would need £59,000 between them.
This includes a three-week holiday, plenty of money to spend on clothing and more money to spend on social activities such as birthdays.
So while you might be able to retire sooner, and boost your pot slightly - it may not be enough for the lifestyle you want.
Another possibility is to consider a gradual approach to retirement, rather than stopping work entirely, Standard Life added.
Standard Life’s Retirement Voice research found that people have different definitions of retirement, with 52% of people thinking of it as something more gradual than stopping paid work altogether.
It’s also important to remember that even after retirement, money left in a pension pot can continue to benefit from investment growth, potentially helping to support a longer retirement.
However, of course, if you can afford it - saving more, as early as possible, can give people more control over how and when they retire.
Boosting your contributions and opting to still retire at state pension age is also a good option and could increase your pot size significantly.
When can I retire?
IF you're wondering when you can retire, it's best to speak to your pension providers.
Firstly, use the government's tool to check your state pension age.
Next check retirement ages on workplace pension schemes - this can massively impact your windfall once you enter your golden years.
For advice, you can contact The Pensions Advisory Service for free online or on 0800 011 3797.
What is auto-enrolment?
Auto-enrolment is when you're automatically placed into your workplace pension scheme, with your contribution deducted from your pay packet.
Bosses have had to automatically enrol staff into pension schemes since October 2012 to get workers saving for their golden years.
The only exception is if you're under the age of 22 or earn under £10,000, in which case you have to ask to opt in.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
Crucially, the contribution you make as an employee is deducted before tax - so the actual amount you're putting away is less than it sounds.
For example, if you pay 20% tax on your earnings, and your pension contribution is £100, this only really costs you £80 as this is how much that amount would have been worth after tax.
While opting out of a workplace pension would increase your monthly salary, it's best to only do this as a last resort, as you'll have less in later life.
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Meanwhile, here's the little-known bank account that could help you retire early.
Plus, savers could be missing out on hundreds of thousands by not making a key move ahead of retirement.
Top tips to boost your pension pot
DON'T know where to start? Here are some tips from financial provider Aviva on how to get going.
- Understand where you start: Before you consider your plans for tomorrow, you'll need to understand where you stand today. Look into your current pension savings and research when you’ll be eligible for the state pension, and how much support you’ll receive.
- Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too.
- Take advantage of online planning tools: Financial providers Aviva and Royal London have tools that give you an idea of what your retirement income will be based on how much you're saving.
- Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected].
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