Does delaying joining a Pension scheme really make a difference?

5 min Read Published: 18 Apr 2013

..you'll be surprised at the answer.

What pension can you expect if you join a scheme today?

Let’s assume you are 37 tomorrow, and about to join a pension scheme. This is a typical scenario as most people find having a large mortgage, and the cost of raising a family is beginning to have less impact by that age.

In this article I am referring to figures within a Personal Pension but most employer schemes are similar so the effect will also be similar. The following figures were calculated based upon investing into two typical funds within a Pension scheme provided by a leading UK provider.

Let’s assume that you can afford £500 per month. You automatically gain tax relief at basic rate so your monthly payment is only £400 (a higher rate taxpayer can reclaim further tax relief via their tax return).

To keep it simple I have assumed you never increase your contributions, although it is likely that you would at some stage. You therefore have 28 years to go before you reach your normal retirement age of 65. This is not to be confused with the state pension age, which has changed regularly in recent years!

Over the 28 years, assuming you are a basic rate taxpayer, you would have contributed a net figure of £134,400 (£400pm x 12 x 28 years) A higher rate taxpayer would have contributed a net figure of £100,800.

At mid range projections you would expect to be able to collect a Tax free lump sum of £110,000 approx. and a regular pension of £16,000 approx. per annum for the rest of your life. You have to agree that’s not a bad return!

The impact of a 3 year delay in joining a pension scheme?

However, if you decide to delay starting contributions for 3 years until you are 40 things are not quite as good. With 25 years to grow, a reduction of only 3 years, the mid projections tell a different story. You will now have contributed a net figure of £120,000 as a basic rate taxpayer (£90,000 if Higher rate), and you will have lost 3 years potential growth on all of the fund.

You would now expect a tax free lump sum of only £87,900 approx., that’s over £22,000 less! The expected pension also reduces to about £12,300, a drop of £3,700 per year for every year that you live. Assuming you live to 80 that’s £77,600 you’ve lost out on!!

But a delay of just 1 year can have a major impact on your retirement

In fact delaying by even just ONE year has a significant effect, reducing the tax free lump sum to £102,000 and the pension to £14,800 per annum. That’s a difference in year one of £9,200, roughly twice the value of the payments you didn’t make in the year of delay!

So does delaying joining a Pension scheme really make a difference?

YOU BET IT DOES! And while it is possible to top up a pension fund with lump sum payments at a later date) the scope for this is becoming increasingly limited and b) you miss out on the potential compounding growth over the longer term.

Darren Amos

Financial Planning Designer

If you would like to contact Darren for help with your financial affairs you can do so via the 'contact the adviser' button below.

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