Pension savings made in the latter part of clients’ careers can have a disproportionate impact on the size of their pension pot, analysis by Standard Life shows.
The data found that working for an extra couple of years can significantly boost retirement income due to a combination of peak earnings, higher pension contributions and compound interest.
With the normal minimum pension age set to increase from 55 to 57 in April 2028, Standard Life said the additional years of working will have a “notable impact”. Its analysis found those who begin working on a salary of £25,000 per year and pay the standard monthly auto-enrolment contribution from the age of 22 would build up a total retirement fund of £171,000 by the age of 55. However, a further two years saving would result in a total pension pot of £193,000.
The key driver behind the increase is compound interest, said Standard Life. By building a pension over time, compound interest builds each year and those who have been working several decades may well be earning a higher salary, meaning pension contributions could be greater and the impact of compound interest will be more significant.
Jenny Holt, managing director for customer savings and investments at Standard Life, said: “Leaving your pension pot untouched towards the end of your career can significantly increase the total amount you retire on by tens of thousands of pounds. This is largely due to the power of compound interest, which gradually builds over time.
“In five years’ time, people will not be able to withdraw from their pension until they reach age of 57, and this extra two years of accumulation should be beneficial to many, especially as retirement funds are going to be expected to stretch further than before, as people tend to live longer and are spending more time in retirement.”
Standard Life recommends people look at the Pensions and Lifetime Savings Association’s ‘Retirement Living Standards’ tool, which gives a better understanding of what retirement looks like at different levels of income.
*if beginning working with a salary of £25,000 per year and paying 3% monthly contributions into a workplace pension at the age of 22 and assuming 3.5% salary growth per year, and 5% a year investment growth. Figures reduced to take effect of inflation, assumed to be 2%. Annual Management Charge of 1% assumed. The figures are an illustration and are not guaranteed.
