Young workers are on track to breach the pension Lifetime Allowance, and it shows the power of compounding

Young workers calculating how much they need to save for retirement can feel like they face an impossible challenge. Yet, research suggests that a significant proportion could be on track to exceed the Lifetime Allowance (LTA).

The findings highlight how valuable saving early and the compounding effect of investments are. 

The LTA is the total amount you can tax-efficiently save into pensions during your lifetime. If you exceed this threshold, additional charges could apply when you start to make withdrawals. 

For the 2022/23 tax year, the Lifetime Allowance is £1,073,100. It will be frozen at this level until April 2026.

For someone just entering the workforce and earning a relatively low wage, the chance of exceeding that threshold can seem far-fetched. 

The top 10% of earners aged 18–21 could exceed the Lifetime Allowance by 58

According to research from PensionBee, the top 10% of earners aged between 18 and 21 could exceed the current LTA by the time they reach 58 – around seven years before the typical retirement age.

While you may assume young workers need to be earning huge sums to achieve this, the salary used for this calculation is £21,899. It also assumed an annual investment return of 7%. 

Even workers with an average salary for this age (£12,275) could boast a pension fund of £777,489 by the age of 60, and exceed the LTA if they work for a further five years. 

It means young people that engage with their pension and start to think about retirement from an early age could look forward to a comfortable life and more flexibility in their later years. 

3 key numbers that will affect what your pension is worth 

The PensionBee research makes some assumptions, which highlight three key numbers that are crucial for reaching retirement goals. 

1. The age you start contributing to a pension

The sooner you start to contribute to your pension and consider how your savings will add up, the better.

The research assumes that workers are opening a pension at the age of 18. Making consistent contributions throughout your working life can lead to good money habits and have a positive effect on your savings.

If you put off adding to your pension, you could end up needing to contribute far more each month to reach the same goal. This is because of the effect of compounding. 

As you won’t access your pension for decades, the returns your investments earn will be invested. Hopefully, returns go on to deliver further returns. So, the longer your savings are invested, the more you could benefit. 

2. The proportion of your income you add to your pension

Of course, the amount going into your pension each month will affect the amount you have when you retire.

Pension auto-enrolment means that most full-time workers over the age of 22 will be auto-enrolled. The minimum amount added to a pension through auto-enrolment is 8% of pensionable earnings – made up of 5% from employees (including 1% tax relief) and 3% from employers. 

However, the PensionBee study assumed workers would put away 15% of their earnings. 

It’s worth reviewing how much you’re putting into your pension and whether you need to increase it to reach your goals. In some cases, your employer may also contribute more.

Remember your contributions will usually benefit from tax relief. So, the extra pension contributions won’t necessarily all need to come from your income.  

3. The performance of your investments

Finally, your pension contributions are usually invested. This provides an opportunity for the value of your pension to grow over the long term.

When you consider that young workers could be contributing to their pension for several decades, investment returns can really add up.

Understanding how your pension is invested and what returns you can realistically expect is important for calculating how the value of your pension could change.

Keep in mind that returns cannot be guaranteed and there may be times when investment values fall.

Please contact us to discuss your pension

Thinking about pensions sooner rather than later can mean you can look forward to a comfortable retirement that meets your goals. If you’d like to talk about your pension, whether you’re just starting to make contributions or are thinking about withdrawals, we can help. 

Please contact us to discuss your financial plan and what you can do to enjoy the retirement you want.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. 

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.  

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