Why 2022 was my biggest pension year for decades

Alice Guy reveals why she’s been out of the pension rat race for years and how 2022 has helped her make up for lost time and kick-start her retirement plans.

We all know that little and often is best when it comes to investing. Investing just £100 per month in an ISA could add up to £152,602 after 40 years, assuming 5% investment growth.

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And it’s an even better deal when it comes to your pension as you’ll get added pension tax relief and employers’ contributions. That means a £100 investment after tax will double to £200 per month, or nearly triple to £267 if you’re a higher-rate taxpayer. With a £267 total investment, your initial £100 monthly outlay could grow to an amazing £407,447 in 40 years.

Lagging pension pot

So much for the theory, but the reality is often somewhat different. The days of a job for life are long gone and many of us have many different stages of our careers and lives. We may go through long periods where we can’t afford to contribute to a pension, or don’t work for a traditional employer that offers to match our contributions.

During our 20s and 30s we may be skint: prioritising saving for a house, forking out eye-watering amounts for childcare, taking a career break, or simply not getting round to pension investing.

I was among those who entered their 40s with a less than stellar pension pot. A combination of a long career break, periods of self-employment and the expensive business of bringing up kids, meant I had times when I couldn’t contribute much to my pension. It left me with a gap to bridge if I wanted to achieve a comfortable retirement.

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And I’m not unusual. Research from the Great British Retirement Survey (commissioned by interactive investor) shows that 35–44 year olds have an average of only £30,600 in their private pension pot and women have even less with an average pot of £26,500 at the same age.

Golden oldies

But thankfully, investing is more like making a slow-cooker stew than a stir-fry, and there’s still plenty of time for many middle-aged savers to salvage a comfortable retirement. Even those with the equivalent of a few left-over sprouts in our pension pots, shouldn’t give up hope of ever retiring just yet.

For many of us middle-aged pension stragglers, there’s still time to prioritise your pension and grow it into a decent-sized pot before you retire.

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Stats from the Great British Retirement Survey go on to reveal that the average pension pot grows to £81,200 between 45-54 years old and £189,700 by the time investors reach 55-60 years old. Late middle age is when many of us finally have some spare money available to invest, or perhaps, when we start to prioritise pension saving.

Prioritising my pension

When I started my first full-time job for years during 2022, I knew that piling as much as possible into my pension was my number one priority. Employer contributions and tax relief mean that I was immediately more than doubling my investment. And, worst-case scenario, it’s only a decade or so before I can access my pot.

Knowing I needed to make up for lost time, I rushed to set up my workplace scheme and decided to pay in significantly more than the prescribed amount. That means I’m paying in way more than I have been for decades and am finally able to see my pot growing again.

A 40-year-old higher rate taxpayer who pays in £300 per month after tax will see their contributions boosted to an amazing £800 after tax relief and employers’ contributions. They could achieve a pot of £476,407 by 65-years-old for contributions that originally cost them only £90,000.

For me, the potentially amazing returns I can get from pension saving are hard to resist, even if it means I need to reduce costs elsewhere. Where else could I benefit from nearly tripling my original investment and also keeping any long-term gains away from the taxman?

Investing in a downturn

Luckily for me, 2022 has been a fantastic year to restart my investing journey. Stock markets around the world are all down on last year, so it’s potentially a time to pick up some bargains.

Many investment trusts are offering fantastic discounts and growth stocks are in the doldrums.

I’ve decided to stick with my tried-and-tested strategy of investing the bulk of my pension (around 70%) in a global index tracker fund. The remaining 30% is where I allow myself some investing leeway and add some more spice with investment trusts, smaller companies and emerging markets funds.

• Why I sold Fundsmith to buy a passive tracker

I’ve also started invested in a stocks and shares ISA for medium-term costs such as university fees, driving lessons, house repairs and perhaps the odd foreign holiday. The list with teenagers is seemingly endless!

How much to invest

The American money guru Dave Ramsey suggests investing 15% in our pension fund, whatever our age. But, to me, this doesn’t make much sense.

To give an extreme example, if you’ve maxed out your pension in your 20s and 30s and are heading for a stellar retirement pot then you can probably afford to just keep things ticking along in your 40s and 50s and contribute less than 15%. On the other hand, if you’re 55 with not a penny to your name, then achieving a comfortable retirement with a 15% contribution seems extremely ambitious.

Then there’s the small matter of working out how much you need for a comfortable retirement. The Pensions and Lifetime Savings Association (PLSA) suggests a couple will need £17,986 (including the state pension) for a basic retirement, £32,956 for a modest retirement and £53,527 for a comfortable retirement (based on 2021 PLSA retirement living standards updated for inflation). Those figures will be higher if you live in London or expect to have continuing housing costs.

In reality, a good rule of thumb is the old adage of dividing your age by two and contributing that percentage to your pension: that’s assuming you haven’t got anything already in your pension pot. Of course, that number starts to look scary the older you get!

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On the plus side, our 40s and 50s is often a time when our costs begin to go down. We’re hopefully earning a bit more and we’ve finished the most expensive period of eye-watering childcare costs. If we’re lucky enough to be on the housing ladder, then our mortgage costs tend to gradually reduce over time. Even with interest rates rising, inflation means our mortgage payments will gradually reduce as a proportion of our salary.

For me, my mid-40s have given me the opportunity to finally get my pensions and investments back on track. Watch out for my upcoming article where I plan ahead and reveal my pension new year’s resolutions for 2023.