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Pension contribution hikes for late starters

01 October 2009 / by Andy Davies

Delaying paying into a pension plan until the age of 40 means that people who want to retire at 65 will have to set aside 33 per cent of their salary if they want a pension equal to two thirds of their salary, Prudential research has claimed.

However, Prudential adds that for someone starting a pension at the age of 30, this contribution is reduced to just over 20 per cent, while for those who begin making pension contributions when they are 18 this figure falls to just below 13 per cent.

According to the figures, a 40 year old worker on the average UK salary of around £26,000 who has just begun saving for their retirement through a combined employee and employer pension plan, will need to set aside more than £700 a month, which equates to nearly £24 a day.

In contrast, a 30 year old would make contributions close to £450 per month while an 18 year old would only need to make daily contribution of just over £9 to achieve a two-thirds pension when they retire at 65.

Urging people to make retirement plans as early as possible, Martyn Bogira, director of Defined Contribution Solutions at Prudential, said: "The findings show very clearly that anyone earning an income should try to begin putting money into a pension as soon as possible as the cost of delay is considerable - for someone aged 40 who's contributing to a pension for the first time, the optimum pension contributions are three times higher than for someone aged 18.

"Understandably, making payments into a pension at age 18 may be a struggle and seem insignificant but even the smallest of contributions has the potential to make a massive difference," he added.

However, despite people being urged to save sufficiently for their retirement, Prudential has found the average contribution made by workers £3.56 a day, while the optimum daily amount currently stands at £9.19.

Concerned by these figures, Mr Bogira believes that people should have a more realistic budget, he said: "With the basic state pension currently paying out less than £5,000 a year it is critical that people get themselves out of the mindset that they will be able to rely solely on the state to look after them financially in their retirement.  

"There is a shifting onus on workers to begin budgeting a more realistic amount which can be paid into a pension especially if they want to improve their chance of being able to enjoy a reasonable quality of life when they do come to retire."

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