Too late to start a pension?

Not long ago, people in their 50s would be deemed to have left it too late to begin saving for retirement. Only a lifetime of pension contributions, allied with some investment growth, could produce a large enough pot to produce a viable income in later life, the conventional wisdom went.

But whilst compound interest does allow money put aside early to grow, most young people do not have much spare cash to invest. Only in middle age can most workers begin to put serious sums aside.

Wages peak in the mid-40s and 50s, according to official statistics.

Not only are incomes at or near their zenith in middle age, two major costs of living are likely to have declined or ceased entirely. Mortgage terms are typically 25 years, meaning that many people who bought properties in their early 20s will be debt free by their 50s.

Likewise, the cost of raising children dwindles.

The pension pot you can expect if you start at 50

Generous tax perks on pensions help even those who start to save from scratch at 50 to build a sizeable pot quickly.

A 50-year-old who earns £70,000 a year could, starting from nothing, build up a pension worth £985,800 by age 67 if they saved the maximum amount allowed each year.

This figure assumes annual growth returns of 4pc after charges and that the pensions “annual allowance” remains at its current level of £40,000 a year.

If the annual growth returns were 1pc after charges the pot would be worth £744,600 by age 67.

Tax relief

The amount you get depends on your income tax bracket - so higher income taxpayers receive more than a basic ratepayer from the Government for every £1 they save into a pension.  For a basic ratepayer to put £100 into their pension, they only need to make an £80 contribution. 

Even people who don't earn enough to pay any income tax can receive tax relief at the basic rate. These nil rate payers can make up to £3,600 of pension contributions a year. 

Saving £40,000 a year may seem a tall order, but remember that this figure includes the tax relief that is applied to all pension savings. Someone who pays the basic rate of 20pc would have to spend £32,000 to save the same amount.

If saving through a personal pension, rather than a scheme operated by a company, higher-rate taxpayers will need to claim back the extra 20pc tax relief via a tax return. All pension savers receive relief at the basic rate automatically.

When it comes to taking money out of your pension in retirement, you can take 25pc as a tax-free lump sum and then pay income tax on further withdrawals, just as you would on any other income.

Since the “pension freedom” reforms were introduced in 2015, unspent pensions have been able to pass down the generations extremely tax efficiently.