As you approach retirement age, you may be starting to plan what your retirement may look like. You will inevitably need to consider how your retirement will be funded. So long as you have at least 10 qualifying years of National Insurance contributions, you’ll be eligible for at least some state pension. 35 qualifying years will make you eligible for the full state pension, currently £11,973 annually. Many will also have at least one workplace pension that will provide a source of income in retirement. If this income will not be sufficient, you may think about an additional private pension.

In this article, we’ll discuss how late is ‘too late’ to start a private pension. We’ll also look at why it is important to build a personal pension pot, how much you may need in retirement and other ways to boost your retirement funds.

Why should you build a pension pot?

Whilst you may have pension income from other sources, including state and workplace pensions, this may not be sufficient for your requirements. Having a private pension on top of this will allow you to maintain financial independence in your retirement. No matter the type of retirement you’re striving for, having financial resources available can significantly lessen stress.

Pensions are a long-term investment. The interest you earn on your investment becomes part of the investment itself. This will then earn interest of its own. Interest earning interest is known as compound interest. This is another benefit of building a pension pot.

How much of a pension pot do you need to retire?

There is no definitive answer to how much you will need in your pension pot. The kind of retirement you’re planning, and when you’re happy to retire, will require differing income levels.

The earlier you plan to retire, the longer your retirement could be. Therefore the bigger a pension pot you may require. This is especially the case if you are planning to retire before you are eligible for the state pension. Similarly, if you plan to spend your retirement travelling the world rather than spending time at home, greater financial resources will be required.

Another factor in determining the size of the pension pot you require is the level of income you are used to prior to retirement. If you have a lower income, less will be needed in retirement to maintain your lifestyle. The Pensions Regulator give a rule of thumb suggesting approximately two-thirds of your pre-retirement income. Retirement Living Standards, based on research by Loughborough University, identify that expenditure by a single person at retirement for a minimum, moderate and comfortable living standard are:

Minimum: £13,400

Moderate: £31,700

Comfortable: £43,900

This assumes an owned home with no mortgage, and is an expenditure guide, not an income guide. These figures should be taken as an indication only; everyone’s circumstances are different.

How much are you able to save per financial year?

There are limits to how much can be saved into a pension in each financial year. Tax relief can be claimed by UK taxpayers on personal contributions worth up to 100% of your annual earnings or £60,000, whichever is lower. There are some exceptions to this, where a tapered allowance is applicable. Find out more in our recent blog post.

You are also able to carry over unused allowances from the previous three financial years, so long as you have been an active member of a pension scheme in each tax year you wish to utilise your annual allowance from. This is called carry forward.

How else can you boost your retirement funds?

Along with saving in pensions, there are additional ways you can boost your retirement funds relating to pensions. If you are eligible for a workplace pension, take advantage of the maximum pension contributions possible from your employer. Another way to boost workplace contributions is to work for longer. This will mean contributions are made for more years. It should be noted, however, that tax relief is not available on contributions after the age of 75.

If you have worked for more than one employer since 2012, there’s every chance you have multiple pension pots. The Pension and Lifetime Savings Association estimate there is around £31 billion in unclaimed, inactive or lost pensions. Our Find My Pension service is available to help you if you feel you may have a lost pension. We’ll try to find your pension schemes and determine if consolidating them is the best option for you.

How late is ‘too late’ for starting a private pension?

After calculating your potential retirement fund requirements, and taking advantage of workplace pension contributions, you may wish to start a private pension. If you’re concerned that you’ve left it too late to do so, don’t worry.

The earlier you start contributing to a private pension, the longer the money invested has to grow*. Additionally, due to exponential growth, the younger you are when you begin pension contributions, the lower the proportion of income that needs to be contributed in order to achieve the same pension value.

However, any size pension pot is better than no pension pot. If you start contributing at age 55, you will still have 12 years of contributions before you reach state pension age. Those looking to retire later may have even more years.

How can Willday Wealth Management help you?

Our team of experts will work with you to build a portfolio of investments. We’ll make sure your money is working hard for you in a tax efficient way. This is the case no matter how old you are when you start your private pension. Planning is key for your retirement. We’ll discuss with you your current financial status, and your retirement plans, including planned retirement age. We’ll then advise you on the best options to achieve your retirement goals.

Contact us to begin the conversation.

* With investing, your capital is at risk and you may get less than what you invested. Tax treatment depends on your individual circumstances and may change in the future.