Up your pension pot by £94,000!

An extra £100 a month towards your pension contributions can make an almighty difference to your standard of living in retirement.

When I think of retirement, I like to think I will be in a similar position to my grandparents. They live in a great apartment, go out and do whatever they want, and basically, live the life of Riley. That's what I want when I reach their age.

However, research from AXA last week found that just shy of 80% of financial advisers felt Brits were saving too little, too late towards their pension. As a result, they are consigning themselves to a life of struggle at a time when they should be enjoying themselves a little.

So are they right? Just how much difference does paying a little bit more, or starting your pension a bit earlier make?

The state option

The current state pension is just £95.25 a week for a single person, or £152.30 a week for a couple. And chances are it will only get worse by the time many of us reach retirement age. So building a decent personal pension pot of your own is a must.

Meet Geoff

(Please see the notes towards the end of the article for an explanation of all the assumptions used on which the following calculations are based.)

Let's use the example of Geoff, a young man aged 30 with no existing pension fund but an annual salary around the national average of £25,000.

If he saves 7% of his salary each month (around £145), and retires at 65, that l will give him with a pension pot of £111,610.63. That equates to a projected income of around £4,880 a year - not a huge amount at all.

Coupled with the state pension, that comes to around £189 a week for a single person. It may not be on the breadline, but it's still not really enough to live in relative comfort in your twilight years, is it?

The early bird

Geoff's work colleague, Paul is 25 and just starting his pension, also with an average salary of £25,000 and also saving 7% of his salary.

Once he retires at 65, his pension fund will have reached the heights of more than £140,000 and a projected annual income of just over £6,100. Not great by any stretch, but a not insignificant improvement of around £1,200 a year compared with Geoff's income, and all because he started his pension five years earlier.

That takes that weekly payment up to a little over £212 a week for a single person - well over double what you would take home simply relying on the state pension alone.

Time to up those payments

Starting five years earlier has given Paul the best part of £30,000 extra in his pot for when he retires, so it's clear that starting earlier with your pension can make a difference. But if they both pay an extra £100 a month, that pension pot starts to swell at a rapid pace.

For both Geoff and Paul, paying £100 a month more than a simple 7% contribution would see them both handing over £245.83 each month - just shy of 12%.

For the 30 year old Geoff, his final retirement pot at the age of 65 would be a mammoth £188,145.38. That's more than £8,200 a year to live on, as well as the state pension, giving Geoff a total of more than £250 a week.

And what about the 25-year old Paul? Well, his final pot would be a quite magnificent £236,654.91 - equating to an annual income of more than £10,000!

So Paul can kick back and enjoy retirement, with a weekly income of almost £300 a week burning a hole in his pocket.

By increasing his contributions by just £100 a month, Geoff has added around £77,000 to his pension pot, while Paul has added almost £94,000! That's a hell of a change, for the sake of a mere £100 a month extra, isn't it?

Employer salary contributions

Now, throughout this piece I've concentrated on Geoff and Paul's own efforts in building their pension pot. But some employers have a role to play too.

Many employers already run pension contribution schemes, whereby they will match any contribution you make towards your pension. If your employer offers this sort of scheme, you would have to be absolutely nuts not to take advantage of it - it's doubling your pension contributions, with no extra effort required on your part!

If your employer does not currently offer such a scheme, they will soon have to. Thanks to the Pensions Act 2008, from 2012 employers will be required to automatically enrol their staff into a workplace pension scheme, with employers required to contribute at least the equivalent of 3% of the employee's salary towards the scheme.

A little on the methodology

I used Hargreaves Lansdown calculator to work this all out - a cracking bit of kit. There are a host of excellent pensions calculators available on the net, including one from Scottish Widows, but in my view the Hargreaves Lansdown version is the best around.

Inevitably with a pension calculator, it does make a few assumptions. These include assuming inflation will stick around the 2.5% for the period of the investment, and that your contributions will increase by 2.5% in line with inflation each year.

It also assumes compound annual growth rates of 7%, though 1% of that is deducted to cover the annual management charge. In addition, retirement income is guaranteed to pay out for five years and remains level throughout, while no spouse's pension is payable

Get started on that pension!

The simple fact is that there is little point in relying on the state to fund our retirement - we will have to put money aside ourselves. The vast majority of you think property should be part of your retirement planning (as you can read in 99% of you still think property's a good investment), and I'm inclined to agree, but getting a decent pension set up is an absolute must.

If you're looking for guidance on how best to get set for life after work, then you should have a look at our goal, Prepare to become a pensioner, for all sorts of handy hints and tips. The earlier you start to prepare for life as a pensioner, the more comfortable that life will be!

More: How to pick your first pension | The great pensions dilemma: should you bother?