How to double your pension

Delaying your pension saving can have a devastating effect on your income in retirement.

As the saying goes ‘the early bird catches the worm'. I think that sums up pensions rather well. Those who save the hardest for the longest should reap the benefits when they retire.

But are pensions on your financial agenda? Perhaps you're more concerned by rising levels of debt or the affordability of your mortgage. That's understandable but putting your pension planning on the back burner could prove to be a costly mistake.

Maybe you plan to use your home to supplement your pension. I think that can sometimes be a mistake since unlocking the value of your home using an equity release scheme can represent extremely poor value for money. Have a look Why you should avoid equity release to find out why. Of course, equity release may be an appropriate solution for some of you, but using your home as a pension pot can be a dangerous strategy, particularly if house prices slump just as you want to retire.

Admittedly pensions don't have a great reputation. It'll be a long time before we forget the impact of the bear market on bringing down pension fund values together with crumbling rates. And with one scandal after another, many of us are left disillusioned with the whole pension concept.

That said, historically shares have always performed well over the long-term, so I think a share-based pension is still the best approach if you start early and save hard.

It's all too easy to put things off until tomorrow. But if you start paying into your pension at 30, instead of waiting until your 40, you could double your pension income when you retire. The earlier you can start the better off you'll be, due to the compound growth over many decades

So let's take a look at the figures. The table below is based on monthly contributions of £200 - which rises inline with inflation each year at a rate of 2.5% -until retirement at age 65. I've assumed your pension fund will grow at 7% each year and your contributions will rise in line with inflation (rising prices) at 2.5% per annum. Charges have also been deducted:

Effects of delaying your pension

If you delay by/Your age	Total pension fund at 7% p.a. growth	Maximum tax free cash at 25%	Projected annual income	% of £6,008 income
0 years/30	£153,069	£38,267	£6,008	100%
1 year/31	£142,262	£35,565	£5,583	93%
5 years/35	£105,258	£26,315	£4,131	69%
10 years/40	£70,522	£17,630	£2,768	46%
15 years/45	£45,459	£11,365	£1,784	30%

The figures are shown in ‘today's money' which means the calculations will take into account the effect of inflation on the value of your pension fund and the income you take from it.

If you start contributing £200 per month into your pension fund from your 30th birthday, your total pension fund could be worth £153,069 by the time you retire at 65. From that, you could take a tax-free lump sum of almost £38,000. Using the remaining £114,802, you might be able to buy an annuity delivering annual income of around £6,000. (I'm making lots of assumptions here, but trust me, these figures are in the right ballpark.)

Find out why it’s crucial to keep your pension contributions up even when money is tight

But - and this is a big but - if you don't start until say, your 40th birthday your income in retirement and your tax-free cash will have fallen more than 50%. I think you'll agree these figures are pretty scary and the longer you delay, the worse it'll get. Put it off for fifteen years and you'll reduce your income by more than two-thirds.

Let's imagine your 30th birthday is a long way behind you (I know it's painful, but try!) and you still haven't paid a bean into your pension. What can you do to make up the shortfall? Basically you have two key options: save harder or save longer or a combination of both. Here I've outlined the contributions you'll have to make to put yourself in the same position had you started at age 30 and still retire at 65.

Option 1: Saving harder

If you start contributions at age:	Monthly payments required to reach £6,008 target income
31 years	£211
35 years	£260
40 years	£346
45 years	£481

As you can see, delaying your pension by five or ten years means you'll have to pay additional monthly contributions of £60 and £146 respectively. Putting off pension payments for fifteen years will mean your contributions will have to more than double to make up the deficit.

The prospect of delaying your retirement to boost your pension is not a good one, but the alternative could be a whole lot worse. If you keep your contributions the same (£200 per month plus inflation-proofing at 2.5%) how long will it be before you can retire on an equivalent level of income (£6,008)?

Option 2: Saving longer

If you start contributions at age:	Age at which £6,008 target income is reached
31 years	66 years
35 years	69 years
40 years	72 years
45 years	75 years

Delaying for ten years until you reach 40 means you could have to work for seven years beyond age 65 to achieve the same level of pension income when you do eventually retire. And I definitely don't fancy working until I'm 75 and I don't expect you do either. But this is the harsh reality of failing to get off the starting blocks early enough.

When it comes to saving in your pension, time - and plenty of it - is crucial. I really can't stress enough the importance of starting as early as you possibly can. And if you're, say, 40, and you haven't started, begin now. Waiting another few years will only make things harder.

More: Help! In my forties and still no pension | Why delaying your pension makes sense