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Pensions and Savings

Advances in medicine and in living standards mean we are now living longer than ever before. According to New Scientist magazine, half the people who have ever reached the age of 65 - in the entire history of mankind - are alive today. Now, estimates of life expectancy suggest that the average female born today will live to a staggering 91 years.

 

All of this is great news for us as individuals. However, before you start dreaming of your long and happy retirement, involving endless games of golf, decades of holidays and extended time with the grandchildren, its worth considering how this is going to be paid for.

Saving from an early age is key

Such expectations for our older age mean saving for our retirement is now more important than ever before; and the earlier you start, the easier it is to build up a decent sum. This gains extra impetus when you consider that the money saved between the ages of 25 and 35 could account for half of your overall amount when you reach 65. The reason for this is compound interest; that is, the way in which interest you earn on your money begins to earn interest on itself.

 

For example, if you invest £5,000 for five years at an interest rate of 5% pa then, at the end of 5 years, you will have £6,381. 5% of this initial £5,000 is £250 a year; a total of £1,250. But actually the money earns £1,381. This additional £131 is the amount earned by the interest itself i.e.: for no additional outlay whatsoever. Simply by leaving this interest invested, you have earned even more money - effectively free.

 

The best thing about compound interest though is the longer it is left to work, the more impressive the figures become. If you left that £5,000 invested for 10 years, your total return would be £8,144 - £644 of which would be entirely down to the interest earning interest. Turn the calculation around and you find that if you want to achieve a pension fund value of £100,000, assuming an interest rate of 6% pa after charges, it would cost £50 a month from age 25, but doubles to £100 a month if you delay the decision to age 35, just 10 years later.

 

Of course, your contribution rate is not the only factor in achieving a decent pension. The assets you choose, the charges and the underlying performance, plus the level of inflation, interest rates and hence annuity rates on the day you retire are all just as important. Many of these can be planned for - but like anything, the earlier you start to think about it, the easier it will be.

 

Pearson Hinchliffe Financial Services | Hollinwood Business Centre, Albert Street, Hollinwood, Gtr Manchester, OL8 3QL
Telephone: +44 (0)161 785 3500, Fax: +44 (0)161 624 2589, Email: enquiries@pearson-hinchliffe.co.uk