From couch to £5K: getting financially fit

Mathilda Volant

by , Team PensionBee

at PensionBee

25 Jan 2022 /  

Two sunlit women walk on treadmills.

For many, New Year’s resolutions tend to be health themed. From changing your diet as part of ‘Veganuary’ to renewing your gym membership or embarking on the NHS ‘Couch to 5K‘ challenge. But what about your financial health? As we often like to say, the best time to start investing in your pension was yesterday, but the second best time is today.

If running 5K this year isn’t quite for you, how about adding an extra £5K towards your retirement fund? Getting financially fit this new year is a resolution anyone can try. And you don’t even need to leave the couch! Here’s three simple steps that could help boost your pension savings by £5,000 in a year.

The following scenario is for illustrative purposes only and assumes:

  • A saver’s pension experiences investment growth, inflation, and an annual management fee.
  • Said saver makes increasing monthly personal pension contributions as their salary increases over time.
  • They are in full-time employment from the age of 22 and earning an average salary for their age.
  • They are continuously enrolled in a defined contribution workplace pension*.

Some employers may enrol you in a defined benefit pension scheme, or not enrol you at all. If you’re unsure which type of pension you have, you can always ask your employer for more information. Learn about the eligibility criteria for Auto-Enrolment.

1. Combine your old forgotten pensions

One of the biggest culprits in reducing your pension wealth is costly fees. Research has revealed that UK savers may pay £12,000 more over 15 years from fees on their old pension pots. When pension providers stack several fees against the value of your pension it slows the growth of your savings. In fact high charges can even erode the value of your pension.

While most providers charge an annual management fee to cover the administrative costs, some providers don’t stop there. Here are some common (and costly) fees to look out for:

  • Contribution fees
  • Exit fees
  • Fund fees
  • Inactivity fees
  • Investment fees
  • Platform fees
  • Service fees

How do you know if you’re paying too much? Well, the government has capped workplace pension fees at 0.75% to limit the erosion of pension wealth from high fees. However, some savers are paying pension fees above this rate, often unknowingly. For example, if your pension grows by 5% every year and your fees are equal to 1% a year you’ll be losing over a fifth of your investment gains to fees.

How much could you save?

The Department for Work and Pensions estimates that an “average person having 11 jobs in their lifetime could lead to 50 million dormant and lost pension pots”. Take our ‘average Joe’ who saves into their pension from age 22 until 66. Those 44 years divided by 11 roles create an average of four years in each role.

Nationwide the median age is 40 years old, which based on our assumptions, would place our average Joe in their fifth job and fifth pension scheme. Let’s see how much fees across all of their pensions could be costing them:

  • Current Pension is £5,118.94 after paying 1% annual fee of £51.71.
  • Dormant Pensions are worth £40,471.12 after paying 1% annual fees of £408.80.
  • PensionBee Pension is £40,593.76 after paying 0.7% annual fee of £286.16.

If each of their four dormant pensions from previous employers charged 1% per year in upkeep, that’s equal to paying £408.80 in fees alone. Not including costs incurred from their current workplace pension. So how does consolidating pensions cut costs? Reducing the amount you pay in fees, would increase the amount remaining in your pension: meaning more money to grow and compound.

Take our default pension plan, Tailored, as an example. It charges only one annual management fee of 0.70% up to £100,000*. Instead of paying multiple fees totalling £408.80, having a consolidated PensionBee pot of the same value may cost only £286.16 in fees.

Have over £100,000? We’ll halve the fee on anything you save over that amount, e.g. 0.70% to 0.35%.

Saving £122.64 in a year by consolidating their old pension pots with PensionBee.

2. Contribute to upgrade your retirement plans

Over recent years government policies have moved more responsibility of saving for retirement from state to saver. Auto-Enrolment is an example of this. Requiring employees to pay a minimum of 5% and employers to pay a minimum of 3% of qualifying earnings into their workplace pension scheme. By savers increasing their workplace pension contributions, this creates less dependence on State Pension benefits at retirement.

And with good reason. Life expectancies are rising and the State Pension age must rise too. Currently, our ‘average Joe’ wouldn’t receive their State Pension until they’re 68 years old. After a lifetime of paying National Insurance (well, 35 qualifying years on their National Insurance record) what kind of full State Pension could they receive?

In the 2021/22 tax year, you’d have £179.60 a week (pre-tax) to live on. Meaning many future retirees will have to rely heavily on their workplace pensions to fund their retirement. Although there is another way. Beyond your salary deductions, you can make additional personal contributions into your pension. Depending on your tax bracket, you could receive a tax top up of at least 25% each time you save!

How much could you save?

Research from Which? reveals the target income for different styles of retirement. Simply covering the essentials as a single-person household would cost £13,000 per year - which is more than the full State Pension. Retiring comfortably would require £19,000 per year, while living in luxury is priced at £31,000 per year. All would rely on additional pension savings or alternative sources of income.

Knowing how much to save isn’t always straightforward. One strategy is making personal contributions of four times your current age into your pension. Let’s see how making these monthly contributions could help our average Joe:

Contributing £160 per month into their consolidated PensionBee pension, average Joe would receive £40 on top in tax relief. Over a year they’d increase their pension by £3,165.47 through contributions, investment growth, and tax relief. Without contributions (and with high fees) the four dormant pensions only manage £642.31 growth in a year.

Setting up regular contributions is easy with PensionBee. You can even do it from the app. Create, amend, or cancel your Direct Debit contributions at any time. We automatically add your available tax relief alongside your contribution - avoiding any unnecessary delays. You can use our pension calculator to see how adjusting your level of contributions can impact the size of your pension.

Saving £2,400 in a year by contributing into their PensionBee pension.

3. Compound your pension wealth

Why does the first pound in your pension make more of an impact than the last pound? Because compound interest grows your investments over the long-term. Having 5% growth on a £1,000 investment could earn you £50 in the first year. Leave that same investment for 50 years and that £1,000 could grow to over £12,000! All without lifting a finger.

Extending your investment window is one way you may increase the value of your pension, giving your money more time to grow. You could do this by:

But saving in your twenties or delaying taking withdrawals from your pension isn’t an option for everyone. If you’re worried it’s too late to start a pension there’s plenty you can do (even in your fifties) to improve your retirement income. Long-term investments like pensions do benefit best from compound growth.

How much could you save?

Adding up all the elements that impact the value of average Joe’s pension, let’s see how both consolidating and contributing into their pension could kickstart compound growth.

The following scenario is for illustrative purposes and assumes:

After inflation and fees, dormant pensions may lose most of their investment gains in a single year. Barely breaking even each year, over the long-term, could stunt potential compound growth. Consolidating dormant pots in an affordable plan can save money from costly fees. By making regular contributions into a consolidated pot, their pension can begin compounding at a faster rate.

Saving £2,164 into their pension from compound growth alone.

Five years later?

As compound growth develops over time, how could completing ‘couch to £5K’ impact average Joe’s pensions five years on.

Between consolidating dormant pensions, making regular contributions, and compound growth - five years later - average Joe would have £13,318.44 more in their pension pot.

Your ‘couch to £5K’ goal recap

Knowing where your pensions are, what fees you’re paying, and if those fees are overtaking the rate of inflation are three key things to stay on top of when it comes to managing your retirement savings. Taking action - by switching to an affordable plan, consolidating your dormant pensions into it and then making regular personal contributions to boost your pension balance - is how you could grow the value of your investments. Here’s three simple steps that could help you achieve ‘couch to £5K’.

  • Consolidate your old pension pots when switching jobs.
  • Contribute four times your age into your personal pension.
  • Choose a plan that offers you the growth potential to reach your retirement goals.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Are you saving for your retirement?

Sign up to PensionBee and we’ll combine your old pensions into a new plan that you can manage online.

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