45 and no pension? My plan to build a £100k-plus retirement fund

Every generation has its own financial pressures to cope with but, for 40-somethings like me, the list is particularly long.

Finding money to buy a house and pay the mortgage, funding childcare and meet the rising cost of living is not easy - and all of it needs to be done as responsibility at work and duties to extended family reach their peak. Given all of that, finding extra money on top to save into a pension can be the thing that’s quietly put off until tomorrow.

That’s certainly true if the conversations I have with my friends in their 40s are anything to go by. Saving for retirement has been the one blind spot in their otherwise well-planned lives. They know they should have paid more attention to it, but it was easy to forget when money was tight at the start of their career. Then came saving a deposit, paying for a wedding and, finally, the financial demands of children.

More than one has told me they see their lack of a pension as a shameful secret - but they needn’t be so hard on themselves. The generation now entering middle age has not enjoyed the advantages that have helped those immediately older and younger than them, at least as far as retirement savings are concerned.

They rarely get access to the more generous company pensions that many baby boomers could rely on. And they are too old to have been automatically put into a company pension from the start of their career like those younger than them were because auto-enrolment only began in 2012.

It’s left many of them with retirement funds that look worryingly small - and some have nothing set aside at all. If that sounds like you, don’t worry. As I tell friends in this position - there’s still time to make a real difference to your income and wealth in retirement, and it’s probably easier to do than you think.

Here’s how you can build a person pot of more than £100,000 from the age of 45 - even if you have nothing saved so far.

Zero to £100k - a plan to get there

In most circumstances, the best place to save for retirement is a pension because the contributions you make benefit from tax relief, any investment growth on your money is tax-free and a large slice of pension money is available free of tax in the future.

If you are an employee, you may have access to a workplace scheme in which your employer will contribute something on your behalf. If that’s not the case, or you want to be able to contribute to your own pension as well, you can open a SIPP - a self-invested personal pension - where tax-relief still applies but there’s no employers to pay in.

To reach your goal of saving £100k by the time you retire you’ll need to set up regular monthly payments from your salary into your pension. How much will it take?

It makes sense to lay out an example, based on a few assumptions. Someone aged 45 today will receive their State Pension from age 68, leaving 23 years of working life ahead of them. The current average pay for someone aged 40-49 is £770 a week, or £40,040 a year,¹ so let’s start there and assume that pay will increase by 3% a year.

Starting from nothing, they could contribute £147 a month, increasing this each year in line with their earnings, and build a pot worth £100,397² by the time they reach 68. That’s based on their money being invested and achieving growth of 5% a year after all fees. This is purely illustrative - investment returns are not guaranteed and can go down as well as up.

Put another away, by contributing a sum worth 4.4% of their salary each month they could hit their £100k target.

And, thanks to tax-relief, that £147 a month contribution will actually cost them less than that. As a basic-rate taxpayer their contribution is boosted by 20% tax relief, which means it only costs them £117.60 a month with the rest added by the tax man.

The difference it will make

The extra £100,397 of pension savings can be accessed and used in different ways. 25% of pension money is usually available tax-free, up to a limit of £268,275 currently, with Income Tax payable on the rest.

One way to turn pension savings into an income is via an annuity, a financial product that provides a guaranteed income for life. It’s usual to purchase an annuity after any tax-free cash has been taken.

Annuity rates change all the time and are influenced by your age, health and other circumstances. At current rates an annuity for a healthy 68-year old would pay an annual income worth between 5% and 6% of the fund used to buy it.³

Based on that, a £100,397 pension pot could generate tax-free cash of £25,100 and then provide annuity income of between £3,765 and £4,518 a year.

Alternatively, you could leave you money invested and take a regular income from it, either by via lump sums or by using drawdown. This means income is not guaranteed, but also that your pension pot remains in your control - you won’t have to give it up as you do when buying an annuity.

The income you can take from investments is dependent on investment returns and your money may run out if you take too much, too quickly. A widely-used starting point for withdrawals is 4% of your fund, with the amounts you take then rising with inflation. This has been shown to have allowed a fund to last 30 years or more in the vast majority of circumstances.

Based on that, a £100,397 pot could generate £4,016 of income a year if the full fund is used. If £25,100 of tax-free cash is taken, then £3,012 of annual income could be generated from the remaining fund.

Those sums may not appear transformative but, believe me, you’d much rather have them than not. If your only other income is the State Pension - currently worth £11,502 a year - then the extra money a £100,000 pension pot can provide represents a substantial uplift.

And remember - the numbers here are what’s possible with a modest sacrifice. Another hundred pounds or more a month, another few percentage points of salary - and the fund you can build begins to look far more reassuring.

If you're unsure whether you're going to hit your retirement savings goals our retirement calculators can help. They allow you to enter details of your savings so far, your age and other income you might have and will calculate the likely savings you'll need to generate the income you want.

The Government's Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800138 3944.

Fidelity's Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

More on saving for retirement

Source:

¹ Average earnings by age and region, House of Commons Library, 18.12.23
² Fidelity International, 7.6.24
³ SharingPensions.co.uk, 22.5.24

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a SIPP and tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). It's important to understand that pension transfers are a complex area and may not be suitable for everyone. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.