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Better a late pension than never

If you have little or no pension by the time you are in your 50s it could still be worth contributing to one
Better a late pension than never
  • If you start a pension at age 50 or older you could still build up a useful amount
  • Pension contributions offer many tax benefits
  • Tax relief and employer contribution mean that pensions savings can grow faster than Isa savings

It is not uncommon for those over the age of 50 not to have a pension or have little in one. This can be for reasons including prioritising mortgage repayments and the costs of raising children, and because employers only started to auto-enrol employees into pension schemes from 2012.

But if you are in this position and have the finances to contribute to a pension in your 50s and 60s, it is still very worthwhile doing.

“Many people in their 50s and 60s have more money available, often as a result of paying off a mortgage, receiving an inheritance or reaching peak earnings in their career,” says Sean McCann, chartered financial planner at NFU Mutual. “Although some people in this age group think they’ve left it too late to invest in pensions, the flexibilities and tax relief available make pensions one of the most attractive investment options available.”

You currently cannot receive your state pension until you are age 66 – and from 2028 age 67 – so may need some income before that. And if you are around age 50 and plan to retire at state Pension age or even a few years before, you still have time to build up enough money to make a difference to you in retirement.


Size of pension pot aged 65 assuming 4% annual growth after fees
Start age£250 monthly contribution£500 monthly contribution£10,000 lump sum£10,000 lump sum + £500 monthly contribution
Source: NFU Mutual


You also don't need to invest all the money yourself. Pensions benefit from tax relief of 20 per cent for basic-rate and non- taxpayers, 40 per cent for higher-rate taxpayers and 45 per cent for additional-rate taxpayers. So, for example, if you pay 40 per cent income tax and invest £60 in a pension, tax relief could take the contribution's value to £100.

You can withdraw 25 per cent of the value of pensions tax-free and withdrawals on top of this are charged at your marginal rate of income tax. However, even if you paid higher or additional-rate tax when you were working, in retirement you might be a basic-rate taxpayer so would only pay 20 per cent income tax.

“A higher-rate taxpayer may be able to create a fund of £10,000 at a net cost to them of £6,000,” says McCann. “If they are a basic-rate taxpayer when they take the benefits they could take 25 per cent – £2,500 tax-free – and pay 20 per cent tax on the remaining £7,500 (£1,500). This would give them £8,500 for a net cost of £6,000 – a return of 41.6 per cent through tax relief alone.”


£6,000 investment by 40% taxpayer who takes out money when 20% taxpayer (not including investment growth)
Contribution plus any tax relief£6,000£10,000
Tax free cash (25%)NA£2,500
20% tax on remainderNA-£1,500
Available cash£6,000£8,500
Source: NFU Mutual


And investment growth is likely to take the value of that £10,000 to a higher value – especially as assets held within pensions can grow free of income and capital gains tax. 

You can withdraw money in pensions from age 55 or from 2028 age 57, so would not have to wait as long as a younger person to access it. But if you can leave it for longer you could build up a fairly sizeable pot.

The sorts of amounts you are likely to build up if you start a pension late, even if relatively small, could supplement the state pension or bridge the gap if you retire before state pension age. Gary Smith, director at Tilney Financial Planning, says that, for example, if your state pension age is 67 but you want to retire at 63 and have no other taxable income, you could draw £12,500 a year and pay no tax on it as this falls within the personal allowance of £12,570. This would be achievable if you had built up a pension of at least £50,000.

He does not think that a smaller sum such as this is big enough to make it worth buying an annuity unless you are in ill health or qualify for an impaired one that pays a higher income. But he does think that with an investment period of, say, 17 years where you start saving at age 50 and retire at 67, it could be possible to build up a sum of around £200,000.

“For example, if monthly contributions of £600 gross after tax relief are made, an annual investment return of 5 per cent would be required to generate a fund of around £200,000 at age 67,” he explains. “Or if monthly contributions of £700 gross after tax relief are made, an annual investment return of 3.75 per cent would be required to generate a fund of around £200,000 at age 67."


Other tax benefits

Your personal allowance for income tax goes down by £1 for every £2 that your adjusted net income is above £100,000 a year. This means that you do not have a personal allowance if your income is £125,140 or above. However, adjusted net income does not include certain tax reliefs such as pension contributions before tax relief. “So if, for example, you earn £105,000 and put £5,000 into a pension you will not lose any of your personal allowance,” says Smith.

If you or your partner earn between £50,000 and £60,000 a year before tax, and you claim child benefit, you have to pay back 1 per cent of your family’s child benefit for every extra £100 you earn over £50,000 each year. But when calculating your relevant earnings for the purposes of child benefit, pension contributions are deducted. So Smith says that if, for example, you earn £52,000 a year and contribute £2,000 to a pension each year, you would get to keep all of your child benefit.

Pensions can be passed onto your heirs free of inheritance tax in many cases. It’s possible to qualify for tax relief on contributions to pensions up to age 75 to create a fund to leave to children and grandchildren, but also access it during your lifetime if necessary, points out McCann.


How to invest in a late pension

Before starting a pension, you and your spouse should make sure that you have both made enough National Insurance contributions to maximise your state pensions. “If not, make the necessary Class 3 National Insurance contributions to ensure that this happens,” says Jason Barefoot, chartered financial planner at Ascot Lloyd.

If you are employed your next port of call should be your workplace scheme. You have to make a minimum contribution of 5 per cent of your salary to it and your employer has to contribute an amount equivalent to at least 3 per cent, and “in many cases the employer will contribute more than the minimum,” adds McCann.

So together with tax relief, your contribution will be given an added boost even before any investment growth.

If you do not contribute to your workplace pension your employer will not give you the benefits in other ways so you would, in effect, lose free money.

You should aim to put in the amount necessary to get the maximum possible contribution from your employer. “Some employers operate tiered systems whereby they will contribute more to your pension in return for you doing the same,” explains Barefoot. “The more you contribute, the greater the amount of tax relief and additional employer contributions. You can also pay additional amounts into your workplace pension which is useful if salary sacrifice is being operated, or towards your own personal pension."

A few employers, particularly those in the public sector, offer final-salary pensions that offer an income in retirement linked to your level of earnings and length of service. This highly valuable benefit provides a secure income in retirement which is index-linked so rises each year, protecting you from investment risk.

If you are self-employed, you could contribute to a personal pension or a self-invested personal pension (Sipp). Although you don't get an employer contribution you still get tax relief at your marginal income tax rate of 20, 40 or 45 per cent.

If you are not earning and paying tax, you can still contribute up to £2,880 to a pension each tax year and get a HM Revenue & Customs top-up of £720 so that the total amount that goes in is £3,600.

Although you may only have an investment timeframe of 17 years or less, Smith says it is still worth having quite a high equity content of maybe 80 per cent – at least for the first few years. You could start to de-risk the pension from 10 years ahead of drawing from it. But if you go into drawdown rather than taking all the money out to, say, buy an annuity, you don't necessarily need to de-risk it as much as you will continue to invest beyond your retirement date.

Smith says that another approach is to build up some money over a period and then move it into lower-risk investments to help preserve its capital value, but continue to put new contributions into higher-risk, potentially higher-return investments.

Barefoot suggests having 12 to 24 months of income in easy-access cash so that you do not have to draw on your investments during a market decline in the early years of your retirement, further depleting its value.

If you are building up a pension fund to pass onto heirs rather than for your retirement income, you could continue to hold higher-growth, higher-risk investments as it will not be drawn for a long time.


Pensions vs Isas

Assets within individual savings accounts (Isas) also grow free of tax and you can withdraw from them without incurring any tax from any age, with the exception of Lifetime Isas. However, advisers generally favour pensions over Isas at age 50 or over if you have nothing or little in the former, and don’t have the capacity to use up both allowances. Pension savings are boosted by tax relief and in some cases employer contributions so could produce significantly higher returns than the same amount in the same investments in an Isa. This is especially the case for higher- and additional-rate taxpayers.

However, you cannot access pension money until you are age 55, and from 2028 age 57. If you need to access your money sooner or have a short life expectancy pensions are not suitable.

If you take money out from a defined-contribution pension over your 25 per cent tax-free entitlement you trigger the money-purchase annual allowance (MPAA), which restricts future contributions to £4,000 each tax year. This includes contributions made by your employer. But taking out your 25 per cent tax-free cash, buying an annuity, taking benefits from a final-salary pension and taking up to three small pension pots worth up to £10,000 each do not trigger the MPAA.

If you only intend to contribute a very small amount, for example £20 a month, it might be difficult to find a pension provider that would accept this, as their minimum contribution levels are often higher. In such cases an Isa might be better.