Delay explained

The cost of delay can be more than you think

If you think retirement planning is something you can put off for a few years without any consequences, think again. The pension contributions you make today can be the most valuable you’ll ever make, simply because they’ll be invested for the longest period.

It’s easy to put off planning for your retirement for a year or two. Trouble is, two years can soon turn into more, and by the time you get round to starting saving, the cost of the retirement income you need could have risen considerably.

Overview
The cost of delay

Starting a pension or other retirement savings plan as early as possible has two main advantages:

You have longer to save
Your pension fund has longer to grow

Putting off starting a pension has the obvious disadvantages that you have a shorter time to save and less time for your pension fund to grow. So to achieve the same pension fund over a shorter period, you have to make higher pension contributions.

How many paydays?

One way of looking at this is to think about the number of paydays you have before you retire, and the number you hope to have afterwards.

Imagine you start your pension plan when you’re age 20, and you plan to retire when you’re age 65. Let’s say you’ll be collecting your pension for the next 20 years. You have 540 paydays between starting your pension plan and retiring.

But if you keep putting things off until you’re aged 40, you’ll have far fewer paydays to save.

The cost of delay

The earlier you start a pension plan, the better chance you have of securing a reasonable tax-free lump sum and income when you retire.

The longer you put things off, the less likely this is to happen.

The difference delay makes

The graph shows the size of fund you could expect at age 65 assuming you pay in £100 a month after basic rate tax relief, starting at various ages. It assumes your investments grow at 7% a year – the mid range rate of return that insurance companies use for pension illustrations.

The longer you put off saving into your pension, the less money you will have to fund your retirement.

It’s never too late

If you’ve still to start a pension plan, don’t leave it any longer. You can always make up the shortfall by investing more over a shorter term, so it’s never too late to start saving.