25-05-2025
‘I'm 30 and can't rely on the state pension. How will I ever retire?'
On paper, Tom Atterton is doing all the right things for a comfortable retirement.
The 30-year-old has a blossoming career in financial services, owns his own home and has moved his pension into high-growth funds with a long-term horizon.
But despite this, Mr Atterton worries he could be working into his 70s. That's partly because he opted out of his workplace pension at the start of his career, preferring to boost his take-home pay instead.
'I was in my early 20s, I wasn't even remotely thinking about retirement.
'And I suppose there was a lot of doom and gloom at that point about how millennials will never retire anyway, there'll be no state pension left. So part of me just thought, 'Oh well, I'll enjoy my life now then'.'
With those years behind him, Mr Atterton hopes to retire before he turns 68, but wonders if this is now out of reach.
So far, he has just £12,500 in an old pension and £2,500 in his current scheme after three years' worth of contributions.
According to the Pensions and Lifetime Savings Association (PLSA), a single person in the UK requires an income of £31,300 for a 'moderate' retirement that includes one holiday a year and several meals out a month.
Mr Atterton, who is based in Aberdeen, says: 'It's a worry. Reliance on the full state pension on its own without any workplace pension isn't going to get you anywhere.'
Many young people face financial instability later in life due to high living costs and inadequate savings.
Defined benefit schemes – which pay a guaranteed income in retirement – have virtually disappeared from the private sector.
Meanwhile, the cost of the 'triple lock' – a government pledge to increase the state pension each year by at least 2.5pc – is expected to hit £20bn a year by 2045, raising questions over whether it will still exist by the time millennials come to retire.
Mr Atterton earns £38,000, and contributes 7pc into his workplace while his employer pays 5pc.
He wonders if he should be making more sacrifices now in order to retire before age 68.
'There will be people who pay nothing into their pension and live a fantastic life now, and then there will be people who pay in everything they can and eat beans every day of the week. I don't want to be in either camp. I want to do a bit of both – not have the most boring, frugal life possible.'
Mr Atterton has already taken some steps to grow his pension. He's switched out of the default option for both his workplace pensions and into the more growth-oriented Legal & General Global Equity Index Fund and Royal London Global Equity Select Fund.
'I'd love to do more sustainable investing. But then I look at the sheets compared to what I've got and obviously they're more expensive and they really don't seem to do as well. So if I were to move those into sustainable funds, while it would be good from a societal point of view, would it be to the detriment of my retirement?'
He hopes that when he comes to remortgage, this may free up some cash, making it easier to increase his pension contributions.
He currently pays about £480 each month on his mortgage, and his 5.3pc fixed-rate deal is due to expire in 2027.
'I know 5.3pc is quite high, but there wasn't much choice. I suppose the positive is that hopefully by 2027 the renewal rate is lower. If my mortgage rate goes down, could I add the difference to my workplace pension? Should I overpay the mortgage or save into my pension – which is the best?'
Tyron Potts, associate at consultancy Barnett Waddingham
If Mr Atterton keeps contributing 12pc of his salary into a pension – including his employer's share – steadily for the next 38 years, and his salary keeps pace with inflation, his pension pot could grow to around £760,000 by the time he reaches 68.
Taking 25pc of that as a tax-free lump sum would leave about £569,000 to generate an annual retirement income of roughly £38,000 in future terms, which would feel equivalent to roughly £11,000 a year in today's money, adjusted for inflation. If he skips the lump sum and leaves the full pot intact, that income could be closer to £15,000 in today's terms.
Right now, £11,000 a year in retirement would fall below the minimum standard of living, and even £15,000 would only just nudge above it.
To enjoy a more comfortable, moderate lifestyle – around £31,000 a year in today's money – he'd need about £1.6m without a lump sum, or around £2.1m with one. These figures are based on UK-wide estimates and don't account for regional cost of living variations. In Scotland, it may be fair to knock 5pc to 10pc off those targets.
To build a pot of that size, he'd need to increase his contributions quite a bit – to around 27pc of his salary (with 22pc from him and 5pc from his employer) to reach £1.6m, or up to 36pc in total (31pc from him and 5pc from his employer) to get to £2.1m.
When saving for retirement – especially in your 20s and 30s – every penny counts. Monthly increases invested now will be supercharged by the power of compound interest.
In practice, contributing an extra one percentage point of his salary for the rest of his working life (so around £100 per month extra to start with) would result in a fund at 68 of £930,000 – which would provide an annual income in today's terms of £18,000, or £14,000 per annum if he takes the 25pc lump sum at age 68.
An extra £200 a month (rising as his salary rises) would result in an estimated fund at age 68 of £1.1m. This could give £21,000 a year today – or £16,000 per annum with a 25pc lump sum.
It's a strong goal if affordable, but should be balanced with living well now. Retirement at 68 might not be considered worth it if life until then is a struggle.
Deborah Riding, financial adviser at Stan Sherlock Associates, part of The Openwork Partnership
Unless funds explicitly state that one of their objectives is not to invest or have any connection to investment in fossil fuels, there is no guarantee they won't be exposed to fossil fuels now or in the future. In the case of Mr Atterton's funds, the fact sheets state no specific restrictions regarding fossil fuels, so exposure is feasible.
If this doesn't sit right with Mr Atterton, then he could consider specialised ESG (environmental, social, and governance) funds for his pension. This is no longer such a niche strategy.
These funds have set guidelines of what they will exclude from their investment strategies such as tobacco, alcohol, armaments, and fossil fuels. ESG and ethical active funds range from ongoing charges of anywhere from 0.55pc to 1.02pc, and ESG and ethical passive funds range from 0.12pc to 0.36pc. The risk category of the investment will also have an impact on the performance.
Overpaying on a mortgage will ultimately reduce the amount of interest he pays. However, he may not be better off if his savings and or investments receive a higher rate of return than the interest he pays on his mortgage.
Overpayment will reduce the capital he owes and increase his equity. It could also reduce his loan-to-value, which may make cheaper mortgage deals available to him. Any money put into pensions can't be accessed until pension age, currently 55 moving to age 57 from April 6 2028. This must be money he doesn't need in the short term.
Certainly, if his mortgage is paid off before retirement, then it will make it easier for him to retire as he will not need as much income to cover any mortgage payments. If the mortgage is paid off earlier, it may allow him to retire earlier.
How quickly he could pay off the mortgage depends on what his current term is now, and the maximum amount his mortgage provider will allow him to overpay without an early repayment charge.
Some allow an overpayment of 10pc or 20pc of the original capital, and some allow an overpayment of the capital balance each year to either 10pc or 20pc. Most lenders allow 10pc, but there are those like NatWest that allow 20pc on some of their products.
It will also depend on what the future interest rates will be on his mortgage for the remainder of the term after his fixed rate deal ends, and how much he could afford to overpay.
Paying into a pension will provide tax relief at his highest marginal rate. So, even as a basic rate taxpayer, he could receive a further 20pc on top of his own funds. Paying into a pension and building up adequate funds could mean he can afford to retire before state pension age.
