If you’ve hit 50 and haven’t started a pension, then you may think it’s no longer worth starting one. However, if you can afford to set aside some cash each month, I think a pension could be one of the best ways to invest at this age. Here, I’m going to explain why I’d definitely still start a pension at 50.
50 is the new 40!
At 50 you’re still relatively young. You have another 17 years until you reach the new State Pension age of 67 that will apply to people born between March 1961 and April 1977.
Here at the Fool, we’d generally recommend a minimum of five years for stock market investments, ideally closer to 10. In my view, 17 years is a very comfortable timescale for investing in stocks.
You will receive free cash
If you can spare some cash each month, you could just save into a Stocks and Shares ISA. But if you did this, you’d miss out on one of the biggest benefits that pensions provide — free cash.
The reason for this is that the government provides tax relief on money paid into your pension. The way this works is that the taxman will credit the income tax you pay into your pension each year, up to certain limits.
In the 2019/20 tax year, you can claim tax relief on up to 100% of your annual earnings, or a maximum pension contribution of £40,000. So if you earned £30,000 and paid £20,000 into your pension, the government would credit another £4,000 (20%) into your pension account.
If you’re a higher rate taxpayer, you’ll receive matching tax relief for income on which you’ve paid the higher rate of tax. So in some cases, your pension contributions could be boosted by 40%, or even 45%.
This cash could speed up your retirement
Having this tax relief credited into your pension account each year could really speed up your retirement savings. Let me explain how this could work.
You pay: You’re a basic rate taxpayer and contribute £500 per month to your pension. Your contributions total £6,000 each year.
Government pays: You’ll receive an extra £100 from the taxman for each month’s contribution. That’s an extra £1,200 each year.
Total contributions: Your pension will get £7,200 each year, even though you’re only saving £6,000 yourself.
This extra cash could have a big impact on your investment results.
What I’d do in this situation is to open a SIPP (Self-Invested Personal Pension) and setup a monthly payment from my current account. I’d then invest the money in a stock market fund, or individual stocks and shares.
In this example, I’ve assumed you’re paying in £500 per month and are investing the cash in a FTSE 100 tracker fund. The long-term average return from the UK stock market is about 8% each year. I’ve used this figure to calculate the future value of your pension fund and the benefit provided by pension tax relief:
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Pension value after 17 years |
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Without tax relief |
£215,899 |
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With tax relief |
£259,078 |
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Benefit from pension tax relief |
+£43,179 |
I’m sure you’ll agree that having an extra £43k when you retire could come in pretty handy.
If you’re prepared to do the extra research necessary to invest in individual shares, then you could potentially see much bigger returns on your cash.
Current pension rules allow you to start withdrawing cash at age 55. If you’re already 50, your money won’t be locked away for long. I’d get started today.