Boost your pension pot – case study

Tariq, 40, is married with one son and works at a design agency earning £55,000 a year. He has been diligently saving into his workplace pension since he was 25 years old. Tariq and his employer contribute a combined 8% of his salary into his pension each year, and he is now sitting on a pot worth just over £71,500.

Tariq feels sure that his diligent savings habits mean he can retire at age 60 and enjoy a comfortable lifestyle in retirement. However, when Tariq takes up the offer of a free consultation with a financial adviser, he realises he could be facing a shortfall.

The adviser explains that if Tariq’s combined pension contributions remain at 8% of salary, his pension at retirement could be worth just over £370,000. This assumes annual investment growth of 5% after fees and before inflation, and that Tariq receives yearly pay rises of 1.5% as well as intermittent salary increases in line with promotions. If Tariq retired at age 60 and started withdrawing £30,000 a year, his pension pot could run out at age 75. As it stands, retiring at age 60 is unlikely to be a realistic goal.

Tariq’s adviser discusses some of the steps he could take to make up the shortfall. One option is to work for a few years longer until age 65. Tariq is reluctant to work for longer, but doing so could add another £140,000 to the projected value of his pension at retirement, allowing him to withdraw £30,000 a year in retirement until age 88. He soon realises that retiring later is a sacrifice worth making.

Tariq’s adviser also suggests trying to increase his pension contributions to 15% of salary. While Tariq can’t afford to do this at the moment, he sets himself the goal of increasing his contributions from age 45, when his son will have finished private school.

Five years later, Tariq sticks to his goal. He can now look forward to a pension pot worth just over £700,000 at retirement, assuming annual investment growth of 5% after fees and before inflation. With careful financial planning, he could start withdrawing a higher income of £35,000 at age 65 and still be left with money in his pension pot at the ripe old age of 93.

The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.