If you’re just setting out on your career journey, retirement feels like a lifetime away. So why am I talking to you about pensions? Stick with me…
Think of your pension as the most superior type of savings account there is – the tradeoff being you can’t access it until you’re over 55. In a nutshell, you pay monthly into your pension, the money is invested, and over time it grows – more than any savings account could ever achieve. (Disclaimer: This is the theory; I am not guaranteeing anything here!) Plus, the earlier you start, the more the pot will grow (and not just because you’re paying into it for longer).
Trust me, in 30 years’ time you will be grateful to your 20-something self for taking two minutes to read this article and a further 30 minutes to set up a pension…you can thank me later!
Here’s five simple reasons you should start paying into a pension now:
1. Start Early, Reap Greater Benefits
One of the greatest advantages of starting a pension young is time. Quite simply, the earlier you begin contributing, the longer your investments have to grow. Plus, without getting too technical, the power of ‘compounding’ means your investment returns generate additional returns over time. In short, even small contributions made in your 20s can grow significantly (and I mean significantly!) by the time you retire.
(If you want to see a great example of this, check this out)
2. Free Money
Pensions offer not one but two ways to potentially benefit from actual free money! Who would turn that down?
Employer contributions – Many employers will match, or exceed, the contributions you choose to pay into your pension (each employer is different in this respect – check with them for the specifics of their scheme). Whatever your employers pay, it goes straight into your pension ‘pot’ to grow on your behalf. In short, Free Money.
Tax relief – Pension saving comes with attractive tax benefits. Contributions to a pension scheme are typically eligible for tax relief, so for every £1 you contribute, the government gives you back a certain percentage (depending on your tax bracket) - Free Money. And that’s not all. Any investment growth within the pension ‘pot’ is also not taxed, allowing your savings to grow more rapidly. More Free Money.
3. Financial Independence
People are living longer than they used to, fact.
Quite simply (unless you have a desire to work into your 70s), this means spending more years in retirement and therefore requires a bigger pot of money to fund that retirement. A moderate lifestyle in retirement (e.g. a foreign holiday once a year and some financial security), is understood to require £23,300 per year for a single person*. It’s safe to say the state pension (if still in existence in the future) will not cover this.
So, if you think you might like to pursue your passions or travel in retirement, you’re going to need to pay into a pension. Full stop.
4. You don’t need to understand investments!
Yes, a pension involves paying into investments which will (hopefully) grow over time. But you don’t need to be an investment professional.
Most pension providers will offer what we call a ‘Lifestyle’ investment strategy. This basically manages which investment funds your pension contributions are paid into without you needing to do anything. It will invest your pension pot into higher risk funds (which in theory generate higher returns) at the early stages of your career and will gradually decrease the level of risk as you get closer to retirement, securing your pension fund for you. The younger you start this, the greater the benefit this strategy will provide for you by way of potential investment returns.
5. It’s so easy - and doesn’t need to make a big dent!
If your employer offers a pension scheme, setting up your contributions should just be a case of completing a simple application form. Once complete, contributions will be taken directly from your salary each month and invested into your pension. Contributions don’t have to make a big dent in your take-home pay. Sacrificing a takeaway or two will make a significant difference down the line.
So, what are you waiting for?
Investing in a pension at a young age is not just a sensible financial decision; it's an investment in your future well-being. If your employer offers a pension scheme, there’s nothing to lose and everything to gain from starting your contributions now. If they don’t yet offer a pension scheme, we’d be pleased to help them get started.
*Calculated by the Pensions and Lifetime Savings Association 2023
This article has been written in general terms and does not constitute investment advice. Investments can go down as well as up. Professional advice from an independent financial adviser should always be sought for your specific scenario.
Read more in this series:
Sensible investing for your future – it’s easier than you think
Conor Boal
Client Relations, Corporate Pensions
