How To Double Your Pension

Delaying your pension can have a devastating effect on your income in retirement.

As the saying goes `the early bird catches the worm'. I think that sums up pensions rather well. Those who save the hardest for the longest should reap the benefits when they retire.

But are pensions on your financial agenda? Perhaps you're more concerned by rising levels of debt or the affordability of your mortgage. That's understandable but putting your pension planning on the back burner could prove to be a costly mistake.

Maybe you're among the 28% -- according to recent research carried out by The Fool - who plan to use your home to supplement your pension. I think that could be a mistake as unlocking the value of your home using an equity release scheme can represent extremely poor value for money. Have a look at my previous article Why You Should Avoid Equity Release to find out why. Using your home as a pension pot can be a dangerous strategy, particularly if house prices slump just as you want to retire.

Admittedly pensions don't have a great reputation. It'll be a long time before we forget the impact of the bear market on bringing down pension fund values. Together with crumbling annuity rates many of us are left disillusioned with the whole pension concept.

However, historically shares have always performed well over the long-term, so I think a share-based pension is still the best approach if you start early and save hard.

It's all too easy to put things off until tomorrow. But if you start paying into your pension at 20, instead of waiting until your 30, you could double your pension income when you retire. The earlier you can start the better off you'll be, due to the The Miracle of Compounding.

So let's take a look at the figures. The table below is based on monthly contributions of £200 until retirement at age 65. I've assumed your pension fund will grow at 7% each year after charges and your contributions will rise in line with inflation (rising prices) at 2.5% per annum.

Effects Of Delaying Your Pension

If You Delay By/Your Age	Total Pension Fund at 7% p.a. Growth	Maximum Tax Free Cash At 25%	Projected Annual Income	% Of £9,576 Income
0 years/20	£238,889	£59,722	£9,576	100%
1 year/21	£223,286	£55,821	£8,950	93%
5 years/25	£169,642	£42,410	£6,800	71%
10 years/30	£118,832	£29,708	£4,763	50%
15 years/35	£81,715	£20,428	£3,270	34%

The figures are shown in `today's money' which means the calculations will take into account the effect of inflation on the value of your pension fund and the income you take from it.

If you're very Foolish and start contributing £200 per month into your pension fund from your 20th birthday, your total pension fund could be worth £239,000 by the time you retire at 65. From that, you could take a tax-free lump sum of almost £60,000. Using the remaining £180,000, you might be able to buy an annuity delivering annual income of around £9,500. (I'm making lots of assumptions here, but trust me, these figures are in the right ballpark.)

But -- and this is a big but -- if you don't start until your 30th birthday your income in retirement and your tax-free cash will have fallen by a massive 50%. I think you'll agree these figures are pretty scary and the longer you delay, the worse it'll get. Put it off for fifteen years and you'll reduce your income by almost two-thirds.

Let's imagine your 20th birthday is a long way behind you (I know it's painful, but try!) and you still haven't paid a bean into your pension. What can you do to make up the shortfall? Basically you have two key options: save harder or save longer (or perhaps a combination of both). Here I've outlined the contributions you'll have to make to put yourself in the same position had you started at age 20 and still retire at 65.

Option One: Saving Harder

If You Start Contributions At Age:	Monthly Payments Required To Reach £9,576 Target Income
21 years	£209
25 years	£251
30 years	£319
35 years	£413

As you can see, delaying your pension by five or ten years means you'll have to pay additional monthly contributions of £51 and £119 respectively. Putting off pension payments for fifteen years will mean your contributions will have to more than double to make up the deficit.

The prospect of delaying your retirement to boost your pension is not a good one, but the alternative could be a whole lot worse. If you keep your contributions the same (£200 per month) how long will it be before you can retire on an equivalent level of income (£9,576)?

Option Two: Saving Longer

If You Start Contributions At Age:	Age At Which £9,576 Target Income Is Reached
21 years	66 years
25 years	68 years
30 years	71 years
35 years	74 years

Delaying for ten years until you reach 30 means you could have to work for six years beyond the normal retirement age to achieve the same level of pension income when you do eventually retire. And I definitely don't fancy working until I'm 74 and I don't expect you do either. But this is the harsh reality of failing to get off the starting blocks early enough.

When it comes to saving in your pension, time - and plenty of it - is crucial. I really can't stress enough the importance of starting as early as you possibly can. And if you're, say, 40, and you haven't started, begin now. Waiting another two years will only make things harder.

Get the ball rolling today!

More: Have a look at our Fool's Pension Guide to help you get started.| Will Your Home Be A Good Pension? | The Four-Step Guide To A Comfortable Retirement.