Why it pays to be patient

We all like to see an instant return from our cash. But being patient will lead to a far healthier pension payout.

Good things come to those who wait. As someone of Irish heritage, that’s a mantra that’s been drilled into me from an early age (mainly about the pouring of Guinness, it has to be said).

It’s a sensible approach to many financial areas, though new research has highlighted it’s increasingly being abandoned in favour of the ‘instant gratification’ culture. And that’s a move that will cost us in the end.

I want it now!

Standard Life found that one in eight people it surveyed said that given the choice between a £640 holiday this year and a £5,000 holiday in five years, they would go for the former. On a nationwide basis, that works out at more than 5.6 million people!

The firm also highlighted some of the things we’d have missed out on as a nation without the patience to wait five years.

• Fewer doctors. If one in eight student doctors didn’t have the patience required to stick with their studies to the bitter end, the NHS would be facing a shortfall of more than 14,000 doctors.
• No Dyson vacuum cleaner. It took Sir James Dyson five years to get the Dyson vacuum right.
• No Harry Potter. Incredible I know, but it took five years from JK Rowling coming up with the idea of a bespectacled wizard until a publisher actually agreed to publish the books.
• No Facebook. It took five years for the social network to grow from a small, local operation to a tool used by 250 million people.

OK, so a world without Harry Potter and Facebook is not necessarily the worst idea. But the point stands that a fair proportion of us don’t have the patience to forego a bit of immediate enjoyment for the long term benefit. And in the area of pensions, that’s a big problem.

Hitting a century

According to Friends Life, one in six of us is going to live to 100 years of age. That’s not just significant for the Royals (that’s going to be a lot of letters that the head of the throne is going to be sending out in the years to come) but also for us and the way that we plan our finances for retirement.

After all, if you’re facing upwards of 30 years in retirement, that’s a fair chunk of cash that you are going to need to set aside to pay for your living costs. And that means saving for retirement as early as possible. You’ll need to be even more patient that Sir James Dyson and JK Rowling – it’s more like 45 years rather than 5 years before you’ll see the fruits of your savings.

But it will make a big difference.

The danger of delaying

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The problem with being young is that old age seems so very far away. If you’re in your 20s, just starting out in the world of work, the idea of being retired seems a lifetime away. When I got my first job after University, my employer offered a cracking defined contribution pension scheme. But I was young, I had other things to spend my money on. So I held off signing up to the scheme for two years. Now, I can’t believe I was so stupid.

Hargreaves Lansdown has put together some great research highlighting the damage that delaying paying into your pension can do to the pot you end up with.

The table below looks at how your final pot changes depending on when you start paying into it, based on a monthly contribution of £216.67 a month, retiring at 66 with a 7% gross return and charges of 1%. The variances are tracked against starting the pension at 25.

As you can see, delaying starting your pension by just five years will see your final pension pot reduced by a whopping 28%. And if you leave it even longer, the pot is cut by half, if not even more.

Living on £158 a week

It’s one thing to see the size of the final pension pot, but looking at the annuity you can then buy with that pot is even more illustrative. Here’s what each of those pension pots will currently get you in terms of a non-guaranteed level annuity if you buy aged 66, and are a non-smoker. I’ve used the FSA’s Money Advice Service website to get these figures.

There’s a big difference between having £3,106 to cover you for the month and £633. Indeed, that works out at a difference between a weekly income of £776.50 and £158.25. Thirty years plus is an awful long time to get by on just £158.25 a week (even with the State Pension on top).

We can always find things to spend that money on instead of putting it aside for our pension. Perhaps a new computer, or an upgrade of our car. And undoubtedly we will get some instant pleasure from that spend. But by being a little financially patient, and focusing on the bigger picture, there’s an even bigger reward down the line for putting that money aside.

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