Is it too late to start a pension?

Are you worried about reaching later life without a pension? If so, then you’re not alone.

In fact, previous research by Unbiased shows that as many as 17% of over-55s have no pension savings outside the state pension. 

But the good news is it’s not too late to make a big difference to your retirement savings. Even smaller amounts into a pension can snowball into a decent nest egg in just a few years.

In this article, we’ll guide you through how to start a pension in your 40s, 50s or 60s, how much you can contribute, and any pitfalls to watch out for.

Why should I start a pension late?

Pensions are a great way to save for the future -  they enjoy some generous advantages that set them apart from other types of savings.

Here are some of the key benefits of starting a pension:

• Pension tax relief gives your savings an additional top-up from the government until you reach age 75. If you’re a basic-rate taxpayer, it only costs you £80 to pay £100 into your pension, while if you’re a higher-rate taxpayer, it only costs £60.

• If you’re in a workplace pension, then you’ll get a top up from your employer too. They legally have to contribute at least 3% of your qualifying earnings as an employer pension contribution, although many pay more.

• You can access your pension from age 55, rising to 57 in 2028.

• Unbiased can match you with a financial adviser, to help you get started.

If you do not have any private pension savings, you’ll be reliant on the state pension, which currently pays £12,547.60 a year.

You can check exactly what you're on track to receive, and how many qualifying National Insurance (NI) years you have, with a free forecast at gov.uk.

How much can I realistically save by retirement?

Even if you’re starting a pension in your 40s, 50s or 60s, you still have time to stash away enough to make a big difference in retirement.

A total monthly contribution worth £200 (including tax relief) could add nearly £34,000 after 10 years - enough for a decent cash buffer to supplement the state pension (assuming 5% investment growth and that  your contributions increase  by 2% each year). 

If you can afford more, or have a longer timescale, then you could potentially squirrel away a significant sum.

Saving a total of £500 each month for 15 years could add up to £151,000 by retirement, (again assuming 5% investment growth and that you up your contributions by 2% each year).

High earners could potentially accumulate astonishing sums in a short time. Paying £2,000 total contribution each month over 15 years could swell to £605,000 by retirement (using the same assumptions).

If you'd like to model your own numbers, Unbiased's pension calculator lets you estimate your future pot based on your age, contributions, and retirement date.

How do I start a pension? 

Starting a pension is quick and easy, with a couple of main options to choose from.

If you work for an employer, then you’ll be automatically enrolled in their pension scheme, within three months of joining, as long as you earn over £10,000.

If you’ve previously opted out of your workplace pension scheme, you can ask to rejoin at any time.

If you’re self-employed or want to save outside your workplace pension, you can open a personal pension like a self-invested personal pension (SIPP).

With a SIPP, you’ll need to choose your own investments, although most providers offer a ready-made selection of quick-start funds.

Don't forget about old or lost pensions

If you've worked for several employers, you may have workplace pensions you've lost track of.

The government's free Pension Tracing Service can help you find contact details for old schemes, so you can get in touch with the provider and decide whether to keep them separate or consolidate them into one plan.

How much can I pay into my pension?

If you’re starting from scratch in later life, you may want to max out your pension contributions and pay as much as you can afford. But there are some strict rules you need to know.

Pension payments are capped at the lower of £60,000 per tax year, or 100% of your earnings in the tax year you make a payment (including tax relief and any employer contributions). 

In some cases you may be able to pay more than the annual allowance.

Carry forward rules let you pay in any unused allowance from the previous three years- although you still can’t pay in more than your earnings in the current tax year.

You’ll also need to have been a member of a pension during those years you are carrying forward. This means you won’t be able to do this if you are starting from scratch, but it may become an option down the line.

Carry forward rules can be particularly helpful for higher earners but you can also use it to boost your pension contributions with an inheritance or other windfall.

For example, if you inherit £200,000 and want to pay this into your pension, you could potentially drip this into your pension over five years.

Assuming you earn £50,000, you could pay in £40,000 each year, which will be topped up to £50,000 after pension tax relief.

After five years, you would have £250,000 in your pension, plus any investment growth.

Pension traps to watch out for

If you’re starting a pension in later life, there are a couple of sneaky tax traps to watch out for.

Once you start taking taxable income from your pension, your annual pension allowance is reduced from £60,000 to £10,000. This lower annual limit is known as the money purchase annual allowance.

This could be an issue if you retire and then return to the workplace and want to restart pension payments. It can also cause problems if you make a taxable pension withdrawal before you’ve stopped working.

You also need to watch out for pension recycling rules, which are designed to stop people withdrawing tax-free cash from their pension just to pay it back in again, as they would benefit twice from pension tax relief. 

You could be caught here if you withdraw £7,500 tax-free cash and increase your pension contributions significantly. Read more here about the detailed rules on pension recycling.

It’s important to get expert advice here because the rules are complicated and it’s easy to slip up.

Is it worth saving into my pension if I’m already retired?

In some cases, it may be worth paying into your pension, even after you retire.

If you’re still working, perhaps part-time, then you could benefit from employer contributions, which is basically free money.

It’s especially worth continuing contributions if you’re a higher-rate taxpayer.

Most higher-rate taxpayers see their tax rate drop once they fully retire, and you can potentially use this to your advantage - you could get 40% tax relief when you pay into a pension, but only pay 20% income tax when you make withdrawals. 

Other ways to boost your retirement income

If your pension alone won't stretch far enough, a few other options can help close the gap:

• Work a little longer: Staying in work past your planned retirement age gives your pension more time to grow, and you can keep contributing.

• Defer your state pension: Putting off your claim increases the weekly amount you'll get once you do start taking it.

• Bring in extra income: A part-time role, letting out a spare room, or turning a hobby into a side income can all help cover any shortfall.

Get expert pension advice

If you’re starting a pension in your 40s, 50s or 60s, then it’s especially important to get expert financial advice to help you make the right decisions.

Unbiased can match you with a qualified financial adviser who can help you invest your money effectively.

They can provide advice on tax and cash flow planning, making sure you get the most out of your retirement income.