When might be the best time to start saving for retirement?

When might be the best time to start saving for retirement?

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    As with many things in finance and life, the best time to start saving is years ago, and the second best time is today!

    Saving for retirement from a young age means your money has more time to grow. Even small, regular savings can result in a substantial pension pot, thanks to compound interest. If you have no retirement savings, then it’s important to make strides today to achieve financial security for the future.

    Albert Einstein famously referred to compound interest as ‘the eighth wonder of the world’, which is no understatement! In this article, we will demonstrate the power of investing in retirement as early as possible.

    For professional help with retirement planning and to discuss which pension scheme is right for you, please get in touch with the experts at Heritage Financial Planning.

    What is compound interest growth, and why is it so powerful?

    Compound interest is essentially the interest you earn on interest or the growth based on the growth you have experienced in the past. Crucially, interest is calculated not only on the initial investment but also on the accrued interest from prior periods, leading to exponential growth over time.

    The opposite of compound interest is simple interest, where future growth is based only on the initial principal amount. This is best demonstrated in an example:

    John has a retirement fund of £100,000 and invests for 30 years with a simple interest rate of 7%. During this time, his money grows to £310,000.

    If John had chosen an investment with compound interest, the initial sum of £100,000 would have grown to over £761,225 – almost double that of the simple interest calculation!

    simple pension interest calculator
    Simple interest calculator showing 7% interest rate over 30 years versus compounded interest.

    Why it’s important to start saving for retirement as early as possible

    In this example, we will look at three different scenarios, assuming their underlying retirement accounts grow by 7% per year and their retirement age is set at 65.

    1. Claire starts investing £5,000 per year at age 21 for 15 years. She makes no further contributions, and the funds are left invested until she is 65. Claire has invested a total of £75,000.
    2. John doesn’t start saving into a personal pension until age 31 and contributes a total of £5,000 per year until age 65. He has invested a total of £170,000.
    3. Finally, Terry is the most serious about his retirement and invests £5,000 per year from age 21 right through to his retirement age of 65. He has invested a total of £220,000.

    Their retirement savings at age 65 can be seen in the chart below:

    retirement savings age 65
    Chart showing the power of compound interest over time

    This highlights the power of compound interest. Although John has saved almost £100,000 more than Claire, her retirement account is worth over £270,000 more than John’s!

    By saving just £75,000 during her lifetime, she would have invested her way to a pension pot of almost £1million.

    Of course, Terry’s is the Goldilocks scenario. If you start retirement saving early and consistently, the slow and steady approach to pension saving can lead to huge amounts of wealth and even help you become a pension millionaire.

    A 7% return seems reasonable when you consider an index made up of the global stock market has done over 10% a year since 1980 (Source: Backtest by Curvo)

    If you are just starting out in the workforce, it can seem tempting to disregard retirement savings or even opt out of auto-enrolment. With the cost of living rising and the difficulty of saving a house deposit, retirement can seem so far away.

    However, unless you absolutely have to, we would strongly advise against opting out of your employer’s workplace pension. As you can see, saving little and often can have a huge impact on retirement planning, and your future self will thank you for it!

    What if I have no pension savings – is it too late to start saving for retirement?

    In short, no! However, if you are older and closer to your retirement age, then this may mean you have to save more, as your funds will have less time to benefit from compound interest growth.

    If you have been employed in the past, then it is likely you will have made the necessary National Insurance contributions to qualify for at least some form of state pension. To qualify for the new full state pension, you need 35 qualifying years. However, if you don’t reach 35 years, it doesn’t mean you won’t receive a state pension; it will just be reduced (assuming you have at least 10 qualifying years).

    The full state pension is currently £203.85 per week, which works at £10,600 per annum. The state pension age is currently 66, although this is due to rise to 67.

    If you are wondering about how much income you need to retire or if you will have enough money in retirement, watch our helpful video:

    Retire in Style: How much do I NEED to RETIRE UK?

    How much should I be saving for retirement

    There is no silver bullet when it comes to working out how much you should be saving. It will depend on many things, such as your desired retirement income, when you wish to retire and how long you are retired.

    A Fidelity study suggests the following savings rates depending on your age range, in order to reach a comfortable retirement:

    AgeSavings Rate
    Age 25 – 3013%
    Age 30 – 3515%
    Age 35 +18%

    Although this may seem intimidating, don’t forget that if you are enrolled on a workplace pension scheme, then you and your employer are contributing a minimum of 8% (5% personally, with your employer contributing 3%).

    It is good practice to be aware of exactly how much your employer contributes, and you should bear this in mind when weighing up job offers, as some employers pay significantly more than others.

    Is a personal pension a good savings vehicle for retirement?

    Personal pensions can be one of the best savings vehicles for retirement as they attract tax relief. This is applied in the form of tax-free contributions and is designed to encourage you to save for retirement.

    This means your pension provider automatically adds tax relief to your contribution, resulting in essentially free money. You receive tax relief at the highest rate of income tax that you pay. So depending on whether you are a Basic Rate, Higher Rate or Additional Rate taxpayer, you will receive 20%, 40% and 45%, respectively.

    This means, as a Basic Rate taxpayer, for every £1 that you pay into a pension, it becomes £1.25 (because £1.25 taxed at 20% = £1). This is like a 25% boost to each pension contribution you make. You can see the cost of making a £100 pension contribution below:

    Chart showing £100 pension contribution Source: Moneybox
    Chart showing £100 pension contribution Source: Moneybox

    Are savings accounts a good vehicle to save for retirement?

    We wouldn’t usually suggest saving for retirement in a savings vehicle. This is because the returns in cash-based products such as cash ISAs, current accounts and savings accounts are usually lower than inflation. This means you could ultimately have less money when you reach retirement age.

    It may be best to invest in a spread of investments in asset classes such as shares, property and fixed income to try and deliver higher returns, but this will depend on your appetite for risk.

    An experienced financial advisor, such as Heritage Financial Planning, can devise an investment strategy based on your risk level in a diversified portfolio.

    A savings account can be useful for acting as your emergency fund or if you are saving money for a specific purpose in a short period of time, say, a home extension in three years’ time.

    How to use the ‘rule of 72’

    A good way of gauging the power of compound interest is to use the ‘rule of 72’. If you divide 72 by your expected growth rate, the result is how many years it will take you to double your money.

    For example, if we assume global stock will continue to grow at 10% a year, like in the example earlier, you will double your money every 7 years (72/10).


    In a nutshell, starting your retirement savings journey sooner rather than later is the golden rule. Pensions, thanks to tax relief, are the ideal investment vehicle for retirement savings. Remember, time is your greatest ally in this journey. Start early, invest wisely, and let compound interest do the magic, creating a financially secure future.

    Contact us

    If you’re unsure about how to maximise your pension savings, then the experts at Heritage Financial Planning can provide valuable guidance.

    Contact us today to arrange a consultation.

    You might also be interested in: Which is the best pension option to take?

    Alex Norman-Jones​

    Alex Norman-Jones​

    I am one of the founders of Heritage and I am highly motivated to deliver bespoke financial planning solutions to my clients.

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