In your thirties

Every six months Hargreaves Lansdown and the think tank Oxford Economics analyse 16 separate measures of wealth for their savings and resilience barometer to build a picture of the nation’s financial health.

Last week they found that the average household in the top 20 per cent of earners had an income of £106,566 in their thirties and had already saved £172,162 into pensions, according to Hargreaves Lansdown. They had £157,207 in property wealth alongside savings of £32,253.

Ollie Saiman from the advisory firm Six Degrees said most high earners who are successful in building wealth make the most of tax-efficient pensions and Isas.

He said: “The dual power of using all your tax allowances and the power of investment growth compounding tax-free means that relatively small regular savings can create significant wealth over time.”

The limit on the annual amount you can save into a pension and still get tax relief is usually £60,000, or 100 per cent of your annual earnings, if that is lower. The £60,000 total includes what you get in tax relief. For a basic rate taxpayer, an £80 pension contribution is topped up to £100 by the government. It costs higher rate taxpayers £60 to make a £100 contribution and additional rate taxpayers £55.

Adults can save up to £20,000 into an Isa each year and any interest earned on cash or gains made on shares are tax-free for life, unlike standard savings and investments accounts.

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Saiman added: “We find that wealth is typically created by leaning into your advantage or edge. Entrepreneurs typically have an edge in a certain sector and a business owner’s edge might be their experience and knowledge.

“Young people also have an edge, which is time. It really is hard to overestimate the power of tax-free compound growth over long periods.”

In your forties

The wealthiest households in their forties had significant pension savings, with the average pot for those in the top 20 per cent of earners being worth £442,559. Liquid savings were much the same as for those in their thirties, at £36,531, and they had accumulated property wealth of £272,901. It is also the age bracket at which household income peaked, at an average of £114,068.

With income at, or nearing, its peak, this stage of life can be an opportunity to boost pension contributions as much as possible, giving the investment plenty of time to grow before retirement.

Hugo Gravell from the investment consultancy Barnett Waddingham said: “If you are saving into a defined contribution workplace pension, a simple and effective way to grow your retirement savings is by auto-escalating your contributions.

“You ensure that your savings keep pace with your financial goals without needing constant attention, but it’s important to choose an increase that aligns with your budget, for example by increasing 1 per cent each year, at every pay rise or in bonus season.”

Some workplace schemes offer the option of automatically increasing contributions on a set date each year, while others require you to email the payroll department.

In your fifties

Hargreaves found that the wealthiest households in their fifties had an average income of £109,731, liquid savings of £49,784 and property wealth of £358,548. By this stage their pension wealth had grown to £762,041.

As the most affluent households get older, they generally have more retirement savings than property equity because two earners in a household may each be building their own pension pot but sharing one home between them.

Sarah Coles from Hargreaves Lansdown said: “It’s a useful reminder of why pensions can be such a key consideration in a divorce. The family home will often be a priority for people, but if they’re giving up pension wealth in return, they need to be aware of the significant asset they are losing.”

Combined pension wealth of £762,041 in a household of two earners — equal to a pot worth around £381,000 each if divided equally — was not such an impossible figure to achieve, Coles said. “If they wanted this size pension by the time they were 55 and started saving at 21, and their employer matched their contributions, they could hit the target by paying £325 into their pension each month,” she said.

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Gravell also emphasised the importance of the state pension, even for the most affluent of households. “With a value of more than £200,000 over a 20-year retirement, it’s important to not overlook the state pension. If there’s a deadline to put in your diary, make sure it is April 5 this year.”

This is the deadline for topping up historic gaps in your national insurance so that you qualify for a full state pension. Usually payments can only be backdated by six years, but this year is the last chance to fill in any gaps going back to 2006. You need 35 years of national insurance contributions to get the maximum new state pension, worth £11,502 a year, and ten years of contributions to get anything at all.

“For some this could equate to a boost of potentially thousands of pounds, so it’s well worth a check. But be aware that topping up contributions won’t make financial sense for everyone, so don’t commit to any payments before doing the maths properly first,” Gravell said.

In your sixties

The top-earning 20 per cent of households in their sixties had an average income of £110,577 and an average pension pot of £1,210,368, according to Hargreaves Lansdown. Their property wealth was £414,617 and they had cash savings of £99,602.

Holding too much in cash savings accounts is a common mistake, Coles said, but can be typical of households approaching retirement who have plans to travel or for house renovations. “While it will make sense if you are keeping cash for specific expenses in the next five years, money you won’t need for five to ten years or more will work far harder for you in a stocks and shares Isa,” she said.

If a couple each paid £350 a month into a workplace pension from age 22 to 66, and their employer matched their contributions, they would accumulate two pots of £605,000 — more than £1.2 million between them, according to Hargreaves Lansdown. This assumed annual investment growth at 5 per cent and 3 per cent a year inflation of contributions.

Auto-enrolment was introduced in 2012, and since 2019 the minimum contribution rate in a workplace pension for most workers has been 8 per cent (with at least 3 per cent paid by the employer).

But often a couple will not have equal opportunity to save the same amount into a pension, or for the same number of years, because of time out of the workplace due to caring responsibilities, unemployment or ill health.

Coles said: “A £1.2 million pension pot is a real stretch for a single person, because they’d have to work twice as hard — paying in £700 a month from age 22 to age 66 — if their employer matched their contributions.” If they retired later at 77, they could reduce their monthly payment to £610 and still hit £1.2 million with their employer’s contributions.

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A £1.2 million retirement pot is more achievable for one person if they have a defined benefit pension. Someone who had worked for 40 years and retired on a final salary of £77,500 in a defined benefit pension scheme would have a private pension worth £1 million, according to Barnett Waddingham. This assumes an accrual rate of 1/70ths and inflationary increases capped at 5 per cent.

Coles added: “These are the households of the very top earners, so nobody should see these figures and worry that they seem far out of reach.

“These groups of people are building decent pension wealth. But once translated into retirement income, it’s not a case of riches beyond their wildest dreams. If they were to take 4 per cent income from their pension, that would be much more than a 50 per cent pay cut in retirement compared with their working life.”