Is it too late to start a pension and do I really need one?

It’s never too late (almost!) do you need one, i would think so! Why do you ask? Most pension sites create white noise in my head so here is my simple take on why you should have one, when you should start and what I wish I’d understood many years ago!

So many books have been written on this subject by people who have spent years of their lives navigating this immense landscape so I will not pretend to know as much as they do by any means, I will just say two key things that I wish I had known YEARS ago.

  1. If you don’t have a pension but you are saving from your post tax income; you are paying WAY too much tax and really missing out on free cash!!
  2. Start young if you still have the option – it really does matter – a LOT

The first point may sound a bit odd so let me explain.

Most people save and invest for the “future” so that they can enjoy an easier (and hopefully earlier) retirement right? Or at least have the choice to move away from the 9-5, 4 week holiday way of existence as soon as possible.

Any money that we put away from our wages has already been taxed. If you put it into a pension instead, you DON’T GET TAXED until you take it out. Now if that sounds like you are just delaying paying tax, it’s not exactly a like for like tax, there are loads of really complicated tax breaks and you’re forgetting about interest, especially compound interest.

If you have a normal job, your employer has to provide you with a pension and they have to contribute to it over and above your salary too. (at least they do in 2019)

For example, if you can save £300 from your take home salary every month and you want to retire in 10 years, you will have a nest egg of £46,497 assuming that you can get a 5% return every year. Sounds ok? – total interest earned: £10,497

So keep that £46k in your head……

Well, if you put this into a pension instead, i.e. you invest it BEFORE you pay tax on it, that same salary sacrifice of £300 actually means that you are investing £375 (assuming 20% tax, more if you are a high rate tax payer of course). Put that into a pension that earns an average of 5% and you now have:

Total interest earned: £13,122

Total fund: £58,122, that’s an extra £11,625, over the term.

Now keep £58k in your head. (Sounding better already isn’t it??)

If your employer contributes to your payment by adding 50% of what you do, that £375 is now £562.50 so that’s £87,183 over the term

Total interest earned: £19,683

Now you have a whopping £87,183!! That’s £40,686 EXTRA For exactly the same outlay of £300 pcm!

This example uses small numbers over a short term, imagine what this could look like over the longer term with more money invested! This same contribution with your employers top up amount would earn £94,195 over 20 years and £162,067 over 25.

Many employers contribute more than 50% too so it would be worth finding out what you are entitled to.

NOTE: I have used a standard saving calculator at: ( for these projections which does not take into account any of the nuances of pensions, it is for illustration purposes only. Please take professional advice before making any decisions.

You will need to pay tax on this when you start to draw down on it but who knows what the laws on that will be by then. I’m not being deliberately evasive here; it’s just that there are quite a few ways to get money out of pension pots, each with differing tax implications. I won’t bore you with the little I know on this, but suffice to say every expert without fail in this field recommends that you invest your money PRE TAX where possible. E.g. put it in a pension vehicle directly from your GROSS salary.

If this small example didn’t really float your boat, let’s look at some bigger longer term numbers and ones where you take a contribution from your employer. (These all assume a conservative annual return of 5%)

year The actual money that you have not had in your pocket in order to contribute to one of these plans If you just save  £300 per month from your NET salary into a normal savings plan If you save it BEFORE tax into a pension fund (from your GROSS salary) If your employer contributes 50% on top of your payment
5 £18,000 £20,427 £25,533 £38,300
10 £36,000 £46,497 £58,122 £87,183
15 £54,000 £79,771 £99,713 £149,570
20 £72,000 £122,237 £152,796 £229,195

£300 per month is not an extortionate amount to save for most of us, especially if you start to really examine where your money is going and being wasted on interest, charges and simply just paying too much for life in the day to day.

£72k of your net salary over 20 years (£3600 annually) is easily spent on nothing much really but knowing that it has the potential to turn into almost £230k between age 30 and age 50 is huge! It could mean that you can finish work years earlier.

This is really the simplest of simple examples, I just wanted to show you that finding ways to invest or save from your GROSS salary is the best way to really make headway and you should take some professional advise ASAP on how to go about this.

Just so you know, almost every get rich quick book (I’ve read quite a few) start with this principle; legal ways to not pay tax and keep your money as long as you can so that it earns interest or generates some form of passive revenue. This is hundreds of pages of wealth management condensed into a single sentence!

Every time you spend money on something you really don’t need, or you see interest payments on your credit cards, just think about the money you are missing out on down the road. Even if you only put a small amount in every month, start asap and make it a habit.

The second point I mentioned above about starting young is WAY more important than you might think.

Option 1: You save £2,500 per year for 10 years between the ages of 21 and 30 into a pension @ 7% and then NEVER add any more to the pot.

Option 2: You start at 31 and save the same £2500 per year for 40 years until you are 70.

  Option 1 (10 year investment) Option 2 (40 year investment)
Capital invested £25,000 £100,000
Amount available @ age 70 £533,000 £534,000
Investment growth factor X 22 X 5

[Note: these figures are from this Telegraph article, but similar examples can be found in most finance books]

There is a very interesting article on entitled 10 pension mistakes you can’t afford to make which is definitely worth a read if this chapter has piqued your interest at all.

You can also find some very interesting figures in this Telegraph article dated 2019 that quite honestly scared the beheebies out of me but it’s good to know!