Starting pension contributions at 25 could save you £ 334 per month


Use the power of compound returns! Saving in a pension in your 20s means sacrificing hundreds less a month later in life, study finds

  • 25-year-old looking to retire at 55 on £ 13,000 a year needs to save £ 496 a month
  • But if they wait a decade until they’re 35, that jumps to £ 830 a month
  • To retire at 65 on £ 19,000 a year, a 25-year-old needs to save £ 479 per person.
  • It rises to £ 716 if they started at 35

Workers who start contributing to a company pension in their 20s are likely to save hundreds of pounds a month in their 30s thanks to the power of compound returns, new research shows.

Capitalization refers to how your investments multiply over time, as you get a return on your initial investment and how that investment grows.

A single person wishing to retire at 55 with £ 13,000 a year on top of the state pension would have to set aside £ 496 a month if they started contributing to a pension at age 25, according to the analysis of the Nutmeg robo-advisor.

Retirement savings: Workers who start contributing to a company pension in their 20s are likely to save hundreds of dollars a month by their 30s

But if they delayed by just five years until the age of 30, they would have to pay an additional £ 133 per month, for a total of £ 629, while if they delayed an entire decade it would rise to £ 830 per month. .

These calculations do not include the state pension, are adjusted for inflation, and are based on the assumption of an average annual return of 5% on your investments, Nutmeg said.

But an income of £ 13,000 a year may not be enough – recent research has found that couples generally need £ 26,000 and singles need £ 19,000 a year for a comfortable retirement.

This amount would cover essential bills as well as regular short-distance vacations, leisure activities, alcohol and charitable donations.

So, to have a more comfortable retirement income of £ 19,000 per year, a 25-year-old would have to save £ 716 per month, reaching £ 1,200 if he delayed until 35 and still wanted to stop working at 55. years, Based on research.

How does the composition work?

Imagine putting £ 100 into a savings account and earning 10% interest on that money.

After one year your account will hold £ 110 (£ 10 interest plus £ 100 principal, i.e. 0.1 x 100 = £ 10 + £ 100).

Now imagine that you leave the accumulated capital in the account and it earns 10 percent interest again.

At the end of the second year, you will have £ 121 (£ 11 interest plus £ 110 starting capital, i.e. 0.1 x 110 = £ 11 + £ 110).

At the end of the third year, you will have £ 133.10 (£ 12.10 interest plus £ 121 starting capital, i.e. 0.1 x 121 = £ 12.10 + £ 121).

Thus, the interest amount increases because the same percentage is applied to a higher starting amount.

Likewise, a couple who started saving at 25 would have to set aside a combined sum of £ 972 each month to retire at 55 with an income of £ 26,000. That goes up to £ 1,630 if they delay until the age of 35.

Waiting for retirement until age 65, which is the current average retirement age in the UK, relieves contributions.

A 25-year-old would need to save £ 479 per month to generate an annual income of £ 19,000, which could reach £ 716 if he started at 35.

But if

Annabelle Williams, Personal Finance Specialist, Nutmeg, said: “When the going is tough, withdrawing from retirement payments can seem like an easy decision to make.

“However, the later you start building your retirement, the harder it is to catch up later in life and the more you’ll have to put aside when you get older.

“This is because you will have missed all these years of good investment performance and the power of compound growth, that is, when your investment performance is added to previous returns.”

She also said that by contributing to your employer pension, you will also benefit from employer contributions.

Typically, with automatic enrollment, the minimum contribution is 8% to 3% of your employer’s free cash, 1% of government tax breaks, and the remaining 4% taken directly from your paycheck.

Some employers go above and beyond these requirements, especially large companies. Staff in FTSE 100 companies enjoy average employer contributions of 8.7 percent.

Although 8 percent is the minimum automatic enrollment, financial experts tend to recommend that you try to save a total of 12 percent of your salary if you want a comfortable retirement.

RETIREMENT CONTRIBUTIONS NECESSARY TO RETIRE AT AGE 55
SINGLE PERSON COUPLING
13,000 income £ 19.00 in income £ 31,000 in income £ 18,000 in income £ 26,000 in income £ 41,000 in income
Age Monthly contributions (£)
25 496 716 1,165 679 972 1,562
30 629 908 1,471 862 1 234 1 978
35 830 1,200 1,938 1 138 1630 2 604
40 1 167 1,688 2,730 1,602 2 296 3,646
45 1,844 2,671 4 323 2,534 3,635 5,720
50 3 884 5 630 9,119 5 339 7.666 12,026
Source: Nutmeg. All calculations assume an annual return on investment of 5%, as the expected average growth range suggested by the Financial Conduct Authority.
CONTRIBUTIONS NECESSARY TO RETIRE AT AGE 65
SINGLE PERSON COUPLING
£ 13,000 in income £ 19.00 in income £ 31,000 in income £ 18,000 in income £ 26,000 in income £ 41,000 in income
AGE Monthly contributions (£)
25 332 479 784 455 655 1,046
30 402 580 947 550 790 1,266
35 496 716 1,165 679 972 1,562
40 629 908 1,471 862 1 234 1 978
45 830 1,200 1,938 1 138 1630 2 604
50 1 167 1,688 2,730 1,602 2 296 3,646
Source: Nutmeg. All calculations assume an annual return on investment of 5%, as the expected average growth range suggested by the Financial Conduct Authority.

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