When I visit companies and speak with their employees about their retirement plans, their aim is to have an income similar to what they have now.
But many people are mistaken in thinking they can’t fund a decent retirement for themselves. I had a conversation with someone along these lines recently - let’s call her “Miss Tayken” (excuse the pun!).
“Miss Tayken” is 37 and is single with young children and a mortgage, with a salary of £36k per year. Once her mortgage and childcare costs cease by the time she retires, she said £1,400 per month would be enough for her living expenses. When I mentioned that the State Pension would provide her with about £1,000 per month, she quickly realised she only needs to save for a further £400 per month. In addition, Miss T benefits from pension contributions from her employer and tax and National Insurance relief on them too.
At the end of our conversation, Miss T felt much more positive about her situation. With another 30 years to save up, plus her existing pension pot, she also felt that she could save enough to retire a few years earlier.
The Power of Compounding: if Miss T invests £100 into her pension today and it grows at 7.2% annually, in 30 years that £100 could grow to £800.
Tax Benefits and Employer Contributions: Miss T contributes 5% of her salary to her pension and her employer adds another 3%, a total of 8% goes into her pension. The advantage is that her 5% contribution effectively costs her less than 4% after tax and National Insurance savings. This means her initial £100 contribution becomes over £200 immediately and can grow to over £1,600 in 30 years. While returns may vary, this illustrates the potential growth she could experience.
Like many, Miss T believed her ideal retirement was out of reach, but it’s time that makes money. Most of the growth comes closer to retirement, which means saving earlier works well, but so can large contributions nearer to retirement.
Don’t be “mistaken” - think differently.