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Understanding the cost of delay with pension planning

31 August 2018

No one is certain whether it was Mark Twain or Oscar Wilde who humorously quipped that you should "Never put off till tomorrow what may be done the day after tomorrow just as well."

What is absolutely certain, however, is that this represents the worst possible advice for anyone involved with pension saving – a practice that is no laughing matter.

Because they feel they have more pressing financial commitments, people regularly see pensions as something they can really break the back of later in their working lives or mistakenly believe that the mandatory minimums required under the pension auto-enrolment regime will do the job for them.

But this attitude can have a massive impact on the ability to fund an adequate retirement. The later anyone leaves it, the steeper those contributions will need to be become, not least because they miss out on the impact that compound interest would have provided.      

Indeed, many procrastinators will find the contributions required unaffordable and will have little option but to carry on working longer than they originally intended. 

In addition to spelling bad news for the employees concerned, it can play havoc with their employer’s succession planning. It is therefore important that HR departments and senior management have a basic understanding of the pension goals their employees need to achieve.   

In my experience such an understanding tends to be particularly lacking amongst those who have been in final salary schemes – where the employee doesn’t have to take any investment risk – because they have never had to give much thought to the size of money purchase pot that even an average earner needs to accumulate.   

The broad rule of thumb is that employees should expect to be retired for around 20 years and, according to government guidelines, average earners should be looking to secure a pension income (including the State pension) of about two thirds of what they enjoyed whilst working.  

The shortfall over their original gross annual salary should be manageable on the grounds that there will no longer be any need to spend on travelling to work or on dressing appropriately for it, and the realisation that salary increases and promotions will no longer be around the corner should encourage frugality.  

Even so, the contribution levels necessary for an average earner with an annual gross salary of £27,271 to achieve a pension income of two thirds by the age of 68 are far greater than many people imagine.


Assuming current annuity rates someone aged 68 today buying a signle life annuity with no index-linking, looking to secure an income of £18,272 (including the State pension of £164.35 a week)) is likely to require a pension pot of £177,985.

Unless employees engage early, achieving this can prove a steep uphill task. Indeed, those starting at age 50 will need to save nearly four times as much a year as those starting at age 20.   

Assuming all monthly contributions are increased by 2.5% a year to reflect pay rises, even those beginning at age 40 will need to start off saving £4,418 a year (16.2% of gross annual salary) whereas those starting at age 20 will need to start their saving at £1,964 a year (7.2% of gross annual salary).   

Many employers, particularly SMEs, will feel they cannot afford to increase the contribution levels they make towards their employees’ pensions to help them achieve such targets. But at the very least they should be thinking of ways of making employees aware of the funding tasks facing them.    

The financial education services that Chase de Vere offers can greatly help in this respect, as well as address a range of other issues that can help employees combat the growing problem of financial stress.  

 Other steps that employers can take include pointing employees in the direction of the government’s Pension Wise service (Tel: 0800 138 3944), which can provide a measure of free guidance, and encouraging them to check their State pension entitlements via www.gov.uk/check-state-pension.  

If you would like to discuss any issues regarding employer or employee pension contributions or find out more about our financial education service then please do not hesitate to contact us on 0345 300 6256 or complete this simple form and we’ll call you.