It’s never too late to start a pension and even a small pension is better than nothing. But starting a pension at 50 brings with it a unique set of questions, challenges and opportunities. If you’re reading this article because you are considering a pension, then please take this as a sign to take action!
In this article, we look at the considerations you might want to make when starting your pension at 50.
Advantages of starting a pension at 50
There are some unique benefits to starting a pension at 50 and there are some benefits that are applicable at any age.
25% tax-free lump sum
The closer you are to retirement age, the less time you will have to wait to access your 25% tax-free lump sum. It makes sense to sacrifice investments elsewhere to maximise your pension contributions in the years running up to your pension age.
Tax relief benefits
If you are starting a pension at 50, then it is possible that you have the potential for higher contributions due to an increased income. With a high income, any money you put towards your pension from income will be free of taxation and reduce your income tax burden. This can save up to 40% tax depending on your income tax bracket.
Compounding growth
“The best time to plant a tree was 20 years ago. The second-best time is now.”
It’s true that the magic of compound interest takes full over decades and not years, but even 10, 15 or 20 years ahead of retirement compound interest can work in your favour. Below is a table that shows what £3,333 a month or £39,996.00 invested a year, over 10 years could achieve.
This growth assumes an 8% return on investments per annum.
| Year | Deposits | Interest | Total Deposits | Accrued Interest | Balance |
|---|---|---|---|---|---|
| 0 | £3,333.00 | – | £3,333.00 | – | £3,333.00 |
| 1 | £39,996.00 | £1,776.24 | £43,329.00 | £1,776.24 | £45,105.24 |
| 2 | £39,996.00 | £5,243.32 | £83,325.00 | £7,019.56 | £90,344.56 |
| 3 | £39,996.00 | £8,998.16 | £123,321.00 | £16,017.71 | £139,338.71 |
| 4 | £39,996.00 | £13,064.65 | £163,317.00 | £29,082.36 | £192,399.36 |
| 5 | £39,996.00 | £17,468.66 | £203,313.00 | £46,551.02 | £249,864.02 |
| 6 | £39,996.00 | £22,238.19 | £243,309.00 | £68,789.21 | £312,098.21 |
| 7 | £39,996.00 | £27,403.60 | £283,305.00 | £96,192.81 | £379,497.81 |
| 8 | £39,996.00 | £32,997.73 | £323,301.00 | £129,190.55 | £452,491.55 |
| 9 | £39,996.00 | £39,056.18 | £363,297.00 | £168,246.73 | £531,543.73 |
| 10 | £39,996.00 | £45,617.47 | £403,293.00 | £213,864.20 | £617,157.20 |
By maxing out your pension over 10 years you can achieve a pension value of £617,157.20. This includes accrued interest of £213,864.20 on your investments.
Drawbacks of starting a pension at 50
While the benefits of starting a pension will work to your advantage, there are of course some considerations and potential drawbacks you need to consider.
Shorter time frame for contributions to grow
You’re still young but time is not on your side when it comes to investments and the potential growth you can attain from compound interest. With that said, the more you can put into your investments as early as possible, the better opportunity you have to maximise any potential return.
Higher contributions are required to catch up
Putting more into your pension to catch up is a wise move, especially with the tax incentives for doing so. However, we need to be mindful that to maximise your pension contributions in the current tax year you would need to be earning at least £40,000 per year.
There are many reasons why you may not have previously started a pension. You may have been self-employed and chosen to forgo contributions. You might not have taken a workplace pension if it had been available. Or you may not have been in employment. It therefore may be the case that starting a pension now and maxing out contributions, could be out of your reach. If that is the case, it is still always great advice to maximise your pension contributions up to a level that you can afford.
Risk of investment losses
Investing is not without risks and to achieve higher returns on your investments, generally, you need to be willing to accept a certain level of risk. Choosing less risky assets often results in less or slower growth of your money.
Generally speaking, over the long term, your investments should return a positive value in excess of your contributions. However, it may also be the case that your investments are at a depreciated value when you need to draw them down.
Remember, your investments may go up or down in value, but you only make gains or losses when you actually sell them. When it comes to drawing down your pension, only then do you need to decide whether or not it is a good time to retire.
Other factors to consider when deciding whether to start a pension at 50
Personal financial goals and circumstances
The decision to start a pension at 50 highly depends on your personal financial goals and circumstances.
Some of you reading this article will be unemployed or working part-time and the financial decision to save for retirement would significantly affect your current quality of life. It still of course makes sense to start a pension, however, you may have other considerations to address first. These could be paying down any debt you have or saving an emergency fund.
Anyone starting a pension will ultimately have to sacrifice some of the money they would have had now for their future goals. It’s important however to take care of your current self, so decide what’s best for you and your circumstances.
Retirement goals and lifestyle expectations
I have met many people who in retirement want to live a relatively modest and simple life. On the other side of the spectrum, I have met people who want a relatively extravagant life and all that comes with it.
Most people are looking to maintain a similar quality of life in their retirement to what they had when they were in the working world. To understand how much you need to save for retirement, it’s important to know how much your life costs by setting a budget currently and what this means for your retirement number.
Both of these topics are covered extensively on the links above and with an understanding of what it will take to retire, we can start to understand how much we would need to achieve this if starting a pension at 50.
Alternatives to starting a pension at 50
A pension isn’t the only way to build wealth and starting a pension at 50 is something you will need to consider carefully. Below we look at some of the alternatives you may want to consider or are already managing as part of your financial planning.
Investing in property or other assets
Apparently, property as an asset has created more millionaires than any other investment class. I can’t find the link source of that statement, but on the face of it, it’s true that this could indeed be true. At age 50, it’s likely you got on the property ladder 2 to 3 decades ago and since then, the average value of properties has increased significantly. Could the equity in your property be used to fund your retirement goals?
Alternatively, you may consider purchasing or already have a buy-to-let property or short-term rental property. Each of these assets could be utilised in lieu of a pension to fund your retirement
Increasing contributions to other retirement accounts
Pensions are one of the most efficient ways to save for your retirement, however, they are not the only way. In fact, there are quite a number of people online who argue against pensions. They do so because your pension funds and the withdrawal of these are at the mercy of Government changes. We have already recently seen increases in the age at which you can access your pension, but what if the Government decided to tax withdrawals differently in the future than they do now? You can be relatively sure it won’t be in your favour but theirs.
Whatever the reason for doing so, many people choose to invest for their retirement in an Individual Savings Accounts or ISAs. ISA’s unlike pensions are funded from after-tax income. So you’ve already paid the tax on the money you are saving or investing. However, the money invested in an ISA can grow and be withdrawn free of taxation. It can also be withdrawn at any age.
Delaying retirement by working longer or part-time
If you’ve read this article and my supporting posts, you may have realised that you may not have enough money to retire with the lifestyle you want. It’s not an ideal situation but remember there is still time to make plenty of changes that will positively affect your life. In addition, you may be entitled to the State Pension at your defined State Pension Age.
Recently the State pension has risen in line with inflation at 10.1%. This means that those qualifying for a full new State Pension will receive £203.85 a week (up from £185.15).
Finally, a significant number of people are choosing to continue working, even on a part-time basis in their elder years. I was chatting with a group of people a few weeks back and a number of them were working part-time to supplement their pensions or to use for travel and holidays.
You may also consider making your hobby into a side hustle to cover its cost or provide additional sources of income.
Recap
Not having long a pension at 50 isn’t common, but neither is it the end of the world. There is still ample time for you to make life-changing decisions, that can benefit your quality of life now and in your later years.
A pension is not the only option either and while it is more common to have one, other investments such as property are an equally valid way to support your financial needs in retirement.
Your circumstances are unique to you and by reading this article you’ve already made positive first steps to deciding whether or not you need to start a pension at 50 or not.
Check out my investing for retirement course
If you’re interested in learning more about investing for retirement at any age, then check out my course on this topic. It’s an easy-to-follow, but comprehensive resource to guide you through the process of setting up your private pension and putting your pension planning on autopilot.
