How to turn just £40 a month into £33,000 in retirement – it’s easy and takes minutes
SAVERS could turn just £40 a month into a whopping £33,000 in retirement by making a few small adjustments.
Increasing your pension contributions by a very small amount over time could boost your retirement funds by tens of thousands of pounds, analysis by Interactive Investor (ii) for The Sun shows.
The savings experts have revealed that by topping up your pension contributions by £40 more a month and then gradually “nudging” them up over time, you will end up with far more than you put in.
This is because of something called compound interest.
Compound interest is where your money earns interest, growing the size of the pot, which then earns even more interest.
This gradually snowballs over time, meaning the rewards for adding just a tiny bit extra each month can be huge.
Craig Rickman, personal finance expert, at ii said that due to the “attractive tax advantages” on offer, the most common way of shovelling money away for old age is to use a pension – but not everyone is making the most of this savings opportunity.
“Saving enough for a financially comfortable retirement isn’t an easy task,” he said.
“Perhaps the trickiest part is striking the right balance between living for today and funding tomorrow.
“None of us want to reach later life feeling like we didn’t make the most of our younger years, nor with insufficient savings to retire on our own terms.
“But just nudging up pension contributions by a modest amount every year can make a notable difference to your eventual retirement savings.”
Mr Rickman gave an example of how the increase can boost your pot for your golden years.
If you save £40 a month into your pension, this is then boosted to £50 due to upfront tax relief.
This is because the Government top-ups your workplace or personal pension in the form of tax relief.
If that £50 a month grew at 5% a year (after charges), you would accrue a pot of £76,301 in 40 years’ time, but would only have spent £24,000.
However, if you started with £40 a month (boosted to £50), but increased payments by just 2.5% every year, you would save a total of £109,671 in 40 years while only spending £40,000.
This is a whopping £33,370, or 44%, more in savings than if you kept your contributions level over the same period, despite only spending £16,000 more.
Craig said there are two reasons for the significantly higher amount.
“First, as your contributions tick up every year, you save more money over the term – £40,000 versus £24,000,” he explained.
“Second, with more money invested, there’s a larger amount to benefit from the superpower that is compound returns.”
How does compound interest work?
Compound returns are where you earn interest on any reinvested interest, which creates a “snowballing effect” that gets bigger and bigger over time.
Of course, making higher contributions would have an even bigger impact on a retirement pot – but even just a 1% increase in contributions would boost your savings.
Starting your pension as early as possible and leaving it to grow means compound interest will build each year.
It’s important to note that even if you’re already quite far into your career, adding a little extra to your fund each month will still help – it’s never too late to add to your retirement funds.
If you’re unsure how much you can top up, it’s best to consult experts and make sure you can afford the increase.
You can get free money guidance from the government-backed Money and Pension Service – visit: maps.org.uk.
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.
Don’t forget employer contributions and tax relief
While adding an extra £40 a month to your workplace pension pot may seem like a pretty big commitment, tax relief and employer contributions do make it worth it, Mr Rickman said.
As we mentioned, the figure includes any contributions from your employer, as well as the upfront tax relief you receive.
Under current pension law, when you pay 5% of your salary into a pension your employer must pay 3% too.
And in some cases, your workplace will offer to pay more, but you might need to match what they pay.
For instance, they might contribute 7% of your salary if you do too.
Mr Rickman explained “Some further good news here is that every time you get a pay rise – either as part of your annual review or a promotion – your pension contributions should also increase.
“This means there’s less need to manually tick up payments.”
It’s worth noting though that self-employed workers don’t have access to auto-enrolment – but all is not lost.
“Pensions are a lot more flexible than they were many years ago, which is handy to anyone with irregular or fluctuating income,” Mr Rickman added.
“With a self-invested personal pension (SIPP) for example, you can start, pause, restart, increase or reduce regular contributions whenever you like.
“And if you prefer to pay in lump sums once profits for the year are known, you can do that at any point, too.”
Anyone who pays into a pension gets tax an immediate upfront boost in the form of a 25% government top.
So, as the examples above show, a £40 per month pension payment is beefed up to £50.
If you’re a higher rate tax payer at 40%, you can get an extra 20% tax relief, which means that every £10 you put into a pension effectively only costs you £6.
Another thing to bear in mind, Mr Rickman added, is that the benefits of increasing what you save every year and compound returns don’t only apply to pension planning.
They’re also relevant to regular savings accounts and tax-free ISAs.
He said: “What I do appreciate is that upping savings amounts, whether pensions or ISAs, has been tough in the past three years due to the rising cost of living.
“But now that things have begun to ease if you can nudge up your savings once a year, your future self might thank you.”
How do I consolidate my pension?
IF you have several workplace pensions that you're no longer paying into, you might be better off consolidating them into a single pot.
There are several advantages to this.
The first is that by having your savings all in one place, you’ll only pay one set of fees.
You can also choose which pension provider you want to transfer the different savings to, so you can pick the best one for you.
It also makes it easier to keep track of your money.
You might want to move all your money to whichever of your existing pots has the best fees, or you could move it all to your current employer pension (if you have one).
Alternatively, you may wish to move money to a private pension or use a consolidator service, such as Pension Bee, Aviva, or Wealthify.
Make sure you compare and contrast your options carefully so that you’re picking the best home for your savings.
You’ll need to look at fees but also might want to consider the investment options available.
If any of your pots are over £30,000 you’ll need to get independent financial advice, but even if you have lots of smaller pots you should consider speaking to an independent financial advisor (IFA).
You can use Unbiased or VouchedFor to find a recommended advisor near you.
Also ask whether you’ll be charged a fee to exit your existing provider and to join your new provider, plus whether the age at which you can access your pension is different – for most people this is currently 55, but is set to rise to 57.
You also need to ensure the pension you’re leaving doesn’t come with valuable added perks, or you could lose out.
Stay alert for pension transfer scams as fraudsters often target people transferring their pension with promises of investments that are too good to be true.
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
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.
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