The impact of compound growth on your retirement pot

5 July 2018

How much does starting to save early for your retirement benefit the end result? Taking a simple example of the State pension, the following will demonstrate the benefit and cost saving of starting to save sooner rather than later.

Currently, a full State pension is £159.55 per week, which is about £8,300 per annum. Based on current annuity rates, a 68-year-old would need a fund of £250,000* to ‘buy’ the State pension. Admittedly, annuity rates are at the lowest point they have ever been, but the underlying principle remains the same.

So how much would it cost to fund a savings pot of £250,000?

Assuming investment returns of 5% per annum, with RPI indexation on the contributions the initial starting point would be:

From age 20 to 68

£105 per month

Total cost over term £112,957 +

From age 30 to 68

£184 per month

Total cost over term £143,041 +

From age 40 to 68

£384 per month

Total cost over term £192,874 +

If a 40-year-old were to save the same amount as a 20-year-old, using the same assumptions above, the final fund would be just £76,500 – a significant difference! It would require growth of approximately 12% per annum to achieve a fund of £250,000.  

Pensions Graph

Now, looking again at the State pension. How much is this likely to be worth to a 20-year-old when they reach 68? If we assume that each year, it increases by 2.5% per annum, then £8,300 per annum increases to £27,100 per annum. A nice pension to have? Well, bear in mind you do not get it for another 48 years, it will be worth broadly the equivalent of £8,300 per annum now! Not so good.

To provide a pension of £27,100 per annum, based on current annuity rates, a 68-year-old would need a fund of £800,000. So how much would it cost a 20-year-old to achieve this level of fund? Using the same assumptions set out above, an initial investment of £300 per month is required.

In summary, it does not matter how you save for your retirement or which vehicle you use. What matters is that you do save and you start early.

* Source – Assureweb 21/5/18 – annuity increases each year in line with RPI

+ Souce – SelectaPension retirement planner 21/5/18

If you need advice on your pension please contact Ellacotts Wealth Planning's Independent Financial Adviser, Chris Slatter who will be happy to advise you on this matter.