A Comparison of Two Individuals Earning the UK Average Wage
Introduction
At Integritas Financial Planners, we are committed to helping individuals make informed decisions about their financial futures. This case study compares two individuals—both aged 30, both earning the UK average wage—who plan to retire at the state retirement age. The only difference: one starts contributing 5% of their salary to a pension at age 30, while the other waits until age 40 to begin. We will explore how much more the early saver will have at retirement and how much more the late starter would need to contribute to catch up.
Assumptions
· Annual Salary: £34,963 (as per the UK average wage in 2024)
· Pension Contribution: 5% of gross salary
· Employer Contribution: Not included for simplicity; only employee contributions considered
· Annual Investment Growth: 5% (net of charges and inflation)
· State Pension Age: 68
· Contribution Periods:
· Individual A: Age 30 to 68 (38 years)
· Individual B: Age 40 to 68 (28 years)
Contributions made monthly and invested at the end of each month
Scenario 1: Starting at Age 30 (Individual A)
Individual A begins contributing 5% of their salary (£1,748 per year or approximately £145.67 per month) to their pension at age 30 and continues until age 68.
· Total Years of Contributions: 38
· Total Amount Contributed: £66,425
With an assumed annual growth rate of 5% (net of charges and inflation), the estimated pension pot at age 68 is approximately £197,862.
Scenario 2: Starting at Age 40 (Individual B)
Individual B delays pension contributions until age 40, then contributes the same 5% (£145.67 per month) until age 68.
· Total Years of Contributions: 28
· Total Amount Contributed: £48,945
With the same growth assumptions, Individual B's pension pot at age 68 is approximately £106,400.
Comparison 1: How Much More Will the Early Starter Have?
By starting pension contributions 10 years earlier, Individual A will have around £91,500 more in their pension pot at retirement compared to Individual B, despite only contributing £17,480 more over their working life. This dramatic difference is primarily due to the power of compounding investment returns over a longer period.
Comparison 2: How Much More Must the Late Starter Save?
If Individual B wants to match Individual A’s retirement pot (£197,862) but only has 28 years to save, they must contribute significantly more each month.
· Required Monthly Contribution: Approximately £270.89 per month (or about 9.30% of salary)
This is nearly double the monthly contribution of Individual A. Waiting just 10 years means Individual B must contribute £125.22 more each month to achieve the same retirement outcome.
Conclusion
This case study highlights the profound impact of starting pension contributions early. The earlier you begin, the more you benefit from investment growth and compounding, allowing you to build a larger pension pot with less financial strain. Delaying contributions means you must save significantly more each month to reach the same retirement goals. At Integritas Financial Planners, we encourage starting your pension journey as soon as possible to secure a comfortable retirement.
For personalised advice tailored to your circumstances, please contact us at www.integritasfp.co.uk.
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