I'm 34 and my pension could be worth millions by the time I retire - should I start saving less? STEVE WEBB replies

'm 34 and have had a pension since I was 18. I have always contributed as much as possible and projected for what is deemed a 'comfortable retirement' or retiring early.

I have a pot of £160,000 currently. My current pension income projection for age 68 is almost 50 per cent more than my actual wage now.

Most projection models online are based on investment returns of 2 per cent, medium of 5 per cent or high at 8 per cent.

The fund I'm currently in has returned 147 per cent over ten years.

While I appreciate some fees and inflation dent this, a return of nearly 15 per cent a year for a decade makes a 'high' of 8 per cent look way off the mark.

If I return even 10 per cent a year going forward it would suggest my pension will be worth millions come retirement.

Pension projection: My pot could be worth millions so should I ease up on saving now?

It seems too good to be true and feels like I've surely misunderstood or got my maths wrong. I just struggle to believe the numbers.

Am I wrong to assume that even close to current performance (which I appreciate is not going to be the same for three decades) places me in an almost absurdly well-off position come retirement?

It makes me think if I am onto a good thing I would rather save less now if I'm already on track for what I suspect could be an absolute winner. 

I could be as my friends say 'less boring' and worry less about the future.

Steve Webb replies: It certainly makes a pleasant change to hear from someone who is concerned they are at risk of having 'too much' money in their pension pot!

But you raise an important question about how pension projections work and how you should interpret them.

Starting with your own position, there is no doubt that having started saving in a pension at 18, and having saved as much as possible since then, you are in a very favourable position compared with most people in their mid 30s – congratulations!

I should say at the outset that I'm going to assume that you are expecting to be a homeowner in retirement.

If not, and if your pension pot will have to fund a rent as well as regular outgoings, you will probably need twice as much as someone who is going to be a homeowner who has paid off their mortgage by the time they retire.

In terms of the return you have achieved in the last ten years, according to my maths you've benefited from a return of around 9.4 per cent rather than 15 per cent.

This is because investment returns are based on 'compound interest', with the return you achieve in the first year also earning a return the second year and so on.

For each £100 in your pot at the start, if you get 9.4 per cent on the value of the pot each year, you would end up with around £247 after a decade which sounds like what you have achieved.

As you will see, this figure is still slightly above the 'high' rate of return included in your pension projections, but not massively so.

The next thing to think about, and a point that you acknowledge, is how inflation fits into all of this.

Over the last ten years, inflation has totalled around 40 per cent, or around 3.4 per cent per year. 

This means that just over a third of the return you have enjoyed has simply been covering the rise in the cost of living rather than making you better off.

However, even if we deduct inflation, you have had a 'real' return of around 6 per cent per annum which is a good return over a ten-year period.

The question is whether this is a realistic assumption for the future. On this point, things look rather less clear-cut.

If we exclude the slump and bounce back following the pandemic, it has been some while since the economy grew in real terms by more than around 2 per cent.

If you invest purely in the UK, there may be challenges in getting 6 per cent real returns in the future.

You can, of course, invest globally, and this is what I assume your pension scheme will have been doing on your behalf.

Until recently around three-quarters of all workplace pension money (in 'pot of money' type pensions) was invested in global equities.

But these indices often invest around one quarter of all their funds in just ten big firms.

The huge boom in the big 'tech' stocks such as Nvidia, Alphabet (Google), Apple, Microsoft, Meta (Facebook), and the like has probably been a major reason for the growth in your pension.

Whether that pace of return will continue over the next decade is much less clear.

Opinions obviously differ, but some are concerned that the excitement over the potential of AI could have inflated the share prices of technology companies and that there is a risk of an 'AI Bubble' being followed by a 'burst'.

One way to respond to this is to diversify your investments, so that you are not so heavily dependent on one country or one sector.

But whilst this probably lowers the risk you are taking, it probably also dampens down your potential return.

Given your age, you may have time on your side to 'weather' short-term volatility in the hope that targeting higher expected returns will deliver over the long term – although diversification is something you could consider more as you approach retirement.

Once again, 'past performance' will not necessarily be a good guide to the future.

Stepping back from the facts and figures, and still assuming that you already own a home or are on the path to homeownership, I do think that the strong start you have made in your pension saving journey gives you some options.

For example, you could continue to save hard, with a view to building up a large enough pension pot to enable you to retire early, well before state pension age.

This might be particularly relevant given that your personal state pension age is already due to be at least 68 and could rise further.

Note however that the age at which you would be able to access your pension is about to rise to 57 and could rise further in future.

An extreme version of this is the 'Financial Independence, Retire Early' (FIRE) movement where people live extremely frugally and save extremely hard with a view to stopping work as soon as they can afford to do so.

Another alternative would be to ease back on your pension saving.

Whilst it's generally a good idea to make the most of any employer contributions that may be on offer (for example, they may match the same amount you contribute, up to a ceiling), it sounds as though you are topping up beyond this.

Perhaps some of this additional saving could be used for enjoying now or supporting causes that you care about?

Alternatively, you could think about investing some of your spare money in other investments (such as Isas) where you would be able to access the pot more easily than with a pension.

Either way, there is no doubt that the sacrifices you have already made and the focus you have given to your pension puts you in a very strong position to be more flexible with your finances and your career if you wish.

Has Steve Webb helped you?

Steve Webb will publish his 500th column for This is Money in a few weeks' time, writes This is Money. 

It's a double celebration because he marked his tenth anniversary as our retirement agony uncle earlier this year.

Did you write in over the past decade and get a reply from Steve that helped with your finances? Or do you recall a column where you learned something important that made a difference to you personally?

One of Steve's most memorable achievements was discovering that more than a hundred thousand elderly women were being underpaid some £800million in state pension. 

Were you one of those affected by the scandal, what did it mean to you, and how did you spend your payout?

We would love to hear from you. Write and tell us your story at pensionquestions@thisismoney.co.uk. Please put ANNIVERSARY in the subject line, and we might publish some of your messages (anonymously) in a special feature when Steve reaches his 500th column milestone next month.

Ask Steve Webb a pension question

Former Pensions Minister Steve Webb is This Is Money's Agony Uncle.

He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.

Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.

If you would like to ask Steve a question about pensions, please email him at pensionquestions@thisismoney.co.uk.

Steve will do his best to reply to your message in a forthcoming column, but he won't be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message - this will be kept confidential and not used for marketing purposes.

If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.

Steve receives many questions about state pension forecasts and COPE ¿ the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve's several earlier columns about state pension forecasts and contracting out, which might be helpful.  

SIPPS: INVEST TO BUILD YOUR PENSION

AJ Bell

AJ Bell

0.25% account fee. Full range of investments

Hargreaves Lansdown

Hargreaves Lansdown

Free fund dealing, 40% off account fees

Interactive Investor

Interactive Investor

From £5.99 per month, £100 of free trades

InvestEngine

InvestEngine

Fee-free ETF investing, £100 welcome bonus

Prosper

Prosper

No account fee and 30 ETF fees refunded

Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.