Strife begins at 40 for pensions late-starters

Workers who don't pay a penny into a pension until they reach the age of 40 may need to set aside upwards of 33 per cent of their salary until age 65 if they want to retire on the holy grail pension of two-thirds annual salary, according to a study from Prudential.

But for someone starting their pension at 30 the amount drops to 20.5 per cent of salary and at age 18 it falls to 12.9 per cent - just over a third of the amount a 40 year old would be required to pay into a pension for the first time.

The cost of delay

Based on the current average salary of £26,020 a 40-year-old worker starting their pension today and aiming to retire at 65 would need to put aside the equivalent of £728.06 a month, or £23.94 a day, from combined employee and employer contributions.

A 30-year-old worker's pension savings would need to total £443.59 a month or £14.58 a day, while an 18-year-old starting work today would need to save an amount equivalent to £9.19 into a pension every day of their life until the age of 65 in order to achieve the optimum pension of two-thirds the current average annual salary of £26,020.

Martyn Bogira, Prudential's Director of Defined Contribution Solutions, said: "The findings show very clearly that anyone earning an income should try to begin putting money into a pension as soon as possible as the cost of delay is considerable - for someone aged 40 who's contributing to a pension for the first time, the optimum pension contributions are three times higher than for someone aged 18.

"Understandably, making payments into a pension at age 18 may be a struggle and seem insignificant but even the smallest of contributions has the potential to make a massive difference. Arguably the simplest and most beneficial way to do this is to pay into an employer's defined contribution scheme and take advantage of any contributions an employer will also make to help make up the optimum amount needed to retire on two-thirds salary."

The grim reality

But in reality the average amount which workers pay into their pensions is just £3.56 a day - this amount includes any employer's contributions - which is £5.63 less than the optimum daily amount of £9.19.

A worker and their employer would need to make a combined pension saving of £9.19 a day, or 12.9 per cent of the average wage, between age 18 until retirement at age 65 in order to build up a pension pot worth £346,931 in today's money, enough to generate an income of £17,347 a year, equivalent to two-thirds of the average UK salary.

And even if a worker opted to take the maximum permitted 25 per cent of the pension fund as a tax-free lump sum at retirement, they would pocket £86,733 as a cash windfall and still receive an annual income of £13,010 in today's money, exactly half the present average annual salary.

But current savings levels of just £3.56 a day - the equivalent of 5 per cent of the average wage - between age 18 and 65 would deliver a retirement pot of £134,476, enough to buy a pension income of £6,724 a year if the entire fund were invested in an annuity or £5,043 a year if the maximum 25 per cent of fund value (£33,619) were taken as tax-free cash.

Martyn Bogira added: "With the basic state pension currently paying out less than £5,000 a year it is critical that people get themselves out of the mindset that they will be able to rely solely on the state to look after them financially in their retirement. There is a shifting onus on workers to begin budgeting a more realistic amount which can be paid into a pension especially if they want to improve their chance of being able to enjoy a reasonable quality of life when they do come to retire."

Research carried out for Prudential in November 2008 revealed that 22 per cent of people who said they were planning to retire in 2009 said they did not have a pension and instead expected to rely on the state pension and other savings.