When is it too late to save into a pension?

Savers who start contributing to a pension at the age of 22 could be £188,000 better off than those who leave it late, a pension firm has stressed. 

An analysis by Standard Life found those that who leave it until they are 40 years old to start saving into a pension would have to contribute a lot of more of their salary each month to accumulate the same amount.

Here, Which? looks at the study to see if it's ever too late to save into a pension and gives advice on how you can boost your retirement fund in late life. 

What retirement savings can you build up?

Standard Life looked at four scenarios to determine how much money you build up into your pension over different periods of time. 

The analysis found that the long-term saver will accumulate £435,000, assuming 3.5% salary growth per year and the standard auto-enrolment contributions (3% employee, 5% employer), and not taking inflation into account.

This is significantly more than the catch-up saver, who only accumulates £247,000. For this saver to build £435,000 by 66, they would need to be contributing 14% of their salary.

When is it too late to save into a pension?

The figures show it’s never too late to start saving as even the 'late starter, early finisher' saver managed to accumulate £95,300 over 15 years. 

However, the earlier you start saving the better and it will give you more options. 

Dean Butler, managing director for customer at Standard Life added: ‘Over the years the combination of contributions and compound investment growth can really add up.

‘If you are going to start saving later then it’s important to think carefully about contributions and what the standard auto-enrolment levels will generate in retirement.’

• Find out more:pension calculator - how much money you'll have 

How much do you need to retire?

To help figure out how much you need in retirement, we spoke to 5,200 Which? retirees in March 2023 to ask about their spending habits. 

Our survey found that people living alone spend an average of £13,000 a year on day-to-day essentials, including food and drink, transport and utility bills. The equivalent figure for couples is £19,000.

Spending rises to £20,000 (£28,000 for couples) when you include some leisure spending, and £32,000 (£44,000 for couples) to include luxuries such as extended long-haul holidays.

Your state pension will fund some of this spending but the rest will need to be covered by a pension. If you live alone you would need between £173,000 and £182,000 in a private pension to help you reach the £20,000 a year target.

• Find out more: how much will you need to retire?   

How to boost your pension in later life

Here are some ways to boost your pension pot: 

Push back your retirement 

If you have a good state pension or income from other sources and continue to pay into your workplace scheme, it could be worth deferring for the extra retirement income you'll get from a defined benefit or defined contribution scheme. 

This is because your money will continue to grow tax-free until you require it, generating more income once you start taking your money.

You can also defer your state pension - if you reached state pension age on or after 6 April 2016, it will increase every week you defer, as long as you defer for at least nine weeks. 

It will increase by the equivalent of 1% for every 9 weeks you defer. This works out as just under 5.8% for every 52 weeks.

• Find out more: should I defer my state pension?   

Boost your state pension

You now need 35 years of National Insurance contributions to qualify for the full state pension, which is worth £203.85 a week in 2023-24.

To qualify for any state pension at all, you need 10 years of National Insurance contributions.

You can top up your state pension if you have gaps in your National Insurance record by paying voluntary contributions.

If you decide to pay for voluntary contributions you'll usually need to do so within six years of the year in question, although there are some exceptions .

• Find out more: should I top up my state pension?   

Search for lost pensions 

You may have pension pots built up while working for past employers that you’ve forgotten about. 

Around 2.8m pensions are considered 'lost' – an increase of 75% over the past four years, according to the Pensions Policy Institute (PPI) and the Association of British Insurers (ABI). 

The average lost pot is worth £9,470, and finding one isn’t always straightforward. 

• Find out more: do you know how to find lost pensions?   

Keep contributing 

Provided you are a UK resident, you can still keep contributing into a workplace scheme and receive tax relief until you’re 75.

When you pay money into a pension you benefit from tax relief. If you're a basic-rate taxpayer, this means that a £100 contribution is boosted to £125. 

Thanks to tax relief and investment growth, any contributions you make today are likely to be worth much more by the time you retire.

But what you’re allowed to contribute will depend on how much you earn and if you’ve already taken some money from your pension. 

If you’re earning less than £3,600, or you’re a non-earner, you can still pay in up to £2,880 each tax year and the government will automatically add up to £720 (20% tax relief) on top. 

If you've taken money out of your pension and are still working, you can still make contributions to a pension and earn tax relief. But the amount you can contribute whilst still getting tax relief is capped at £10,000 in the 2023-24 year. 

This is called the money purchase annual allowance and applies to those who have taken money from a money purchase, or defined contribution pension.

If you’ve taken your 25% tax free lump sum or bought an annuity then you won’t have triggered your MPAA which means you keep contributing as much as you want into your pension and benefit from tax-relief, subject to the annual allowance which is £60,000 for most people.

• Find out more: tax relief on pension contributions explained