The simple change that could help you retire 3 years earlier with a £20k pension boost

Increasing pension contributions by just two per cent over the course a person's career could add nearly £20,000 more in their pot, compared to saving the minimum auto-enrolment rates new analysis from Standard Life, part of Phoenix Group revealed.

Standard Life analysis showed how increasing pension contributions by two per cent could also give people the option of retiring three years early.

But those who retire earlier will need to make their savings last longer or consider alternatives like phasing into retirement.

Dean Butler, managing director for customer at Standard Life said: “There’s no one size fits all when it comes to people’s retirement goals, however consistently saving a relatively small amount more can increase your options and potentially buy you more retirement time.

"Pensions are both incredibly tax efficient and, over a number of years, allow for the potential of compound investment growth - meaning a little now can have a large future impact."

Changing pension contributions can have a significant impact on retirement outcome.

For example, someone that began working full-time with a salary of £25,000 per year and paid the minimum auto-enrolment contributions (three per cent employee, five per cent employer) from the age of 22, could amass a total retirement fund of £434,000, not adjusted for inflation, at the age of 66 – the current state pension age.

However, if they were to increase their monthly contributions by two per cent (seven per cent employee, three per cent employer) from the age of 22, they could amass a larger fund value (£453,000) by age 63 – gaining £19,000 and the option to retire three years earlier, Standard Life research found.

Those who increase their monthly contributions by two per cent (seven per cent employee, three per cent employer) from the age of 22 could create a larger fund of £542,000 if they retire at 66. This would be £108,000 more than the minimum auto-enrolment contributions for the same time period.

Butler added: "Pensions aren’t always priority number one, particularly earlier in life, however increasing your contributions above the minimum levels is likely to pay off if you’re in a position to do so. Some employers match any contributions you make, giving your pot an even bigger boost."

The problem with planning to retire earlier means that people will have to find extra money to fund their extra retirement years.

People choosing to retire earlier might need to make similar retirement pots last longer and spread their savings over more years.

For those looking to maintain a higher income in retirement, the figures show that paying in an additional three per cent into their pension over the course of their career right up to the current state pension age would generate a pension pot of £651,000 or £217,000 more than based on standard contributions.

Another possibility is to consider a gradual approach to retirement, rather than stopping work entirely.

Standard Life’s Retirement Voice research found that people have different definitions of retirement, with 52 per cent of people thinking of it as something more gradual than stopping paid work altogether.

It’s also important to remember that even after retirement, money left in a pension pot can continue to benefit from investment growth, potentially helping to support a longer retirement.

Saving more, as early as possible, can give people more control over how and when they retire.

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The Pension and Lifetime Savings Association (PLSA) shows a ‘moderate’ standard of living in retirement now costs a single person £8,000 or 34.3 per cent more than it did in 2022/2023.

Their research found that to achieve a moderate retirement, savers would need a pension pot of around £23,300 to £31,300 for a single person and from £34,000 to £43,100 for a couple.

The cost of a moderate retirement is based on spending around £100 a week on groceries, £60 a week on eating out, running a small second-hand car, having a week holidaying in Europe and a long weekend break in the UK.

It should be noted that every individuals desired retirement is based on their specific needs. There is no 'one size fits all' figure as to what people need to achieve to live comfortably in retirement.