This Mistake Could Wreck Your Retirement

Here's why this budget cut back could prove to be a costly mistake.

Despite the endless press coverage given to the much-feared `Pensions Crisis', it seems repeated warnings to beef up our retirement savings have fallen on deaf ears.

Recent research from financial advice and stock-broking firm, Edward Jones, reveals the dire news that 43 per cent of us are now saving less into our pensions, while almost a quarter haven't even started planning for retirement yet.  

This is directly as a result of rampant inflation which has seen food and energy prices escalate throughout the year, leaving even less cash available to fund our pensions.

As if that wasn't bad enough, spiralling mortgage costs are also putting huge pressure on over-stretched budgets. Something has got to give and it seems it's pensions which are biting the dust.   

There's no question juggling your finances isn't always easy. Unless there's absolutely no way you can keep up with your pension contributions, cutting back or stopping them entirely could be a very costly mistake.

Just take a look at the figures below which show the impact on your final pension fund if you trim back your monthly contributions from £200 to £100 or £50:

Cutting Back

Source:  Hargreaves Lansdown. *Figures are based on the payout from a standard annuity for a male, aged 65 providing a level income which is guaranteed to pay out for a minimum of 5 years. No spouse's benefits have been included.

Before I talk about the table, I want to make it clear that the figures are shown in `today's money'. This means they have been adjusted to take into account the effect of inflation over time. In this example, inflation is assumed to compound annually at 2.5% (although this may seem low in the current climate).

So back to the figures -- it takes no great genius to work out the more you put into your pension, the more you'll get out. But hang on a minute -- what if you haven't even started your pension yet? You may be very tempted to put it off with so many other drains on your finances. But this could have a devastating effect on your standard of living in retirement.

The figures below show how much your pension fund will shrink, if you delay for five years.

Losing A Third Off Your Pension Fund

Source:  Hargreaves Lansdown. Assumed annual growth rate is 7%.

As you can see, postponing your pension savings for five years could easily knock one-third off the final value of your pension fund by the time you reach 65. Sure, by delaying your contributions for five years you would have saved a few thousand pounds, but that's really little compensation for what you're left with at retirement.

Let's say you start to pay £200 a month into your pension at the age of 30, rather than waiting until 35. True, you would paid £12,000 more in contributions over those five years -- but even taking that into account -- your final pension would still be worth nearly £36,000 more.

I don't want to doom-monger too much. If you delay your pension until you reach your mid-thirties, there are still plenty of working years left to build up a reasonable pot by the time your retire. But the longer you leave it, the less time there is to make up missed contributions.

Already fifty?

If you have already reached your fifties but you still haven't done anything about planning for your retirement, you need to take action now. Read Pensions: Five Top Tips For Late Starters for some hints on how to make up for lost time.

In an ideal world we would all start paying a modest amount into a pension at 18, which would provide a pretty decent pension pot at 65. But we don't live in an ideal world, and inflation is making it even worse. But please try to think of your pension as an essential bill which has to be paid too. 

More: We're All Equitable Life Losers | Give Your Pension An £11,000 Boost