At 27, I only have £5,000 saved for a pension

In our Pensions Crisis Coach series, we aim to help ease your retirement worries. Are you concerned you’re not saving enough for your later years, do you want to know if you have enough to retire or don’t know how to find your lost pensions? Email us at money@theipaper.com. We’ll seek to get you on the right track with help from some of the best financial experts and advisers in the business.

Joe writes: I am 27 and after finishing university I went to do a PhD. This doesn’t come with a traditional wage so from ages 22 to 26 I didn’t save for a pension at all. I’ve since done a couple of jobs in the past year, but my pension is still very small.

I’m in a good job now where I am earning £60,000 and wondered if it was worth me putting loads into my pension to compensate – how far behind am I?

My work pays 7 per cent regardless of what I pay, and it offers an incentive whereby if you pay more into your pension, the employer pays what it has saved on national insurance into your pension too on top.

My other competing financial demands are saving for a house, which I hope to do in the next couple of years. I currently rent for around £1,000 a month.

Alina Khan, The i Paper’s money coach reporter responds… After receiving your email, I needed to ascertain how much you currently had in your pension. Following some back and forth exchanges, you told me you have £5,000 in your pot in a defined contribution pension.

In DC schemes, workers save into individual pots, and the final value depends on contributions and investment returns. It is the worker’s responsibility for making this money last throughout their retirement.

I know you say £5,000 is a “very small” amount but the fact that you have started saving in the first place is a good thing and you are asking all the right questions.

You are 27 meaning you still have time on your side to be able to boost your contributions and benefit from compound interest.

Compound interest is the interest you earn on the interest you have previously earned in the account.

It can be difficult to think about retirement and putting more money into your pension when it seems like something in the distant future, especially when you have other more immediate financial goals, like wanting to buy a house.

Adrian Murphy, chief executive of financial advice firm Murphy Wealth, said to understand how “far behind” you are will depend on what your goal is.

“How much of a pot do you want to build up? Or do you have a particular retirement age in mind? Spending some time defining what your aims are is an important first step, as that will act as the foundation of your financial plan,” he explained.

As of this month, the state pension age has increased from 66 to 67, you may choose to retire after or before this age depending on how much you have in your private pension and other savings.

According to data from the Office for National Statistics, in 2022 (the latest data set they have) the average pension savings for 25 to 34-year-olds is £18,800.

However, Murphy noted this figure was probably skewed towards those in the upper end of the age bracket, meaning you are probably not far off the same financial situation as your peers.

Also, the fact your employer contributes 7 per cent to your pension regardless of how much you pay is a great perk and not something all employers offer.

In the UK, employers are obligated to contribute at least 3 per cent towards your pension pot under auto-enrolment rules, with the minimum overall contribution needing to be 8 per cent.

The National Insurance contribution top up is also something that is not offered by all employers and is a perk you should consider utilising while you still work there.

Employers tend to offer salary sacrifice schemes, whereby employees exchange part of their salary for employer pension contributions, this allows them save on income tax and NI because the sacrificed amount is deducted from their gross salary before tax is calculated.

Employers also benefit as they save on their own NI contributions on the amount sacrificed and sometimes choose to pass these savings onto employees, as in your case.

Murphy said: “A lot will be influenced by how aggressively you want to save for a house in the next few years. If you are doing that and planning on making significant contributions to your pension, you need to be careful not to leave yourself short of money every month in the here and now.”

Depending on your student loan situation, Murphy highlighted the £1,000 a month you spend on rent may account for nearly a third of your monthly earnings.

He added: “If you’re trying to save for a deposit on top of that, you could be looking at around half of your wage being set aside for housing-related expenses. Trying to maximise your pension contributions at the same time may put unnecessary strain on your finances.”

Adding a few extra per cent to your pension contributions will no doubt be a positive thing and the sooner you start contributing more the bigger difference it will make in the long term.

To physically see the difference increasing your contributions will make, you can use the MoneyHelper pension calculator, which can give you a forecast of the likely pension income you will receive in retirement and a target retirement income to aim for.

When you get your results, you can alter your retirement age to see how that affects your income.

Murphy said: “Before deciding whether to try and compensate for the years you couldn’t make contributions in a significant way, it’s important to have a long-term plan in place that also ensures you are looking after your immediate financial needs.”

It looks like you are on the right track and by asking these questions you will put yourself in a better position when you do eventually come to retire.