Why start your pension early?

Nearly all of us ask ourselves, when should I start a pension early? The answer is as soon as you possibly can, it is never too early to start saving into a pension.

Paying a modest £100 per month into a pension from the age of 18 for 49 years at 3% compound interest would give you a pension pot of £130,000.

If you delayed paying into a pension by 10 years and started at the age of 28, this figure drops to £86,000.

Why might I need a pension?

When you are young, it can be easy to put off thinking about things like pensions, as retirement seems far away in the distant future, and many often ignore it until much later in life. But the longer you delay starting a pension early, the more you could be losing out on retirement.

Even if you can only afford small payments when you are young, you can always increase your payments in the future when your income rises.

When you start working, if you are over 22 years old and earning more than £10,000 in full-time employment, you will be enrolled in a workplace pension, and your employer will also make contributions to your pension fund.

If you are self-employed, you will need to start saving into your own personal pension. You can then decide how much you want to contribute monthly, and you can also increase or decrease your payments whenever you need to.

The state pension has never been adequate to cover living costs and expenses, it will also be considerably less than your salary. The full state pension is just £203.85 per week, which is £10,600.20 per year.

You may not be entitled to the full state pension if you do not have 35 years of national insurance contributions. The age at which you receive your state pension is also being constantly increased by the government.

Having other pensions, either workplace or personal pensions is one of the best ways to save for a comfortable retirement. The longer your funds are invested and you contribute, the more money you will have in retirement.

You can also access your pension savings before your state pension age; even if you are still working you can access your pension funds at age 55, due to increase to age 57 in April 2028.

Tax relief

Pension tax relief benefits are what make pensions unique. When you contribute to a pension, the government repays your tax at the highest rate you usually pay; this effectively gives you extra ‘free’ money, meaning you make money every time you contribute.

For a basic rate taxpayer, if you contribute £100 to your pension and the government adds 20% as well, this gives you £120, it may not seem a lot, but the longer you take advantage of this, the more you can increase your final pension pot.

Employer’s contributions

As well as tax relief, when you are in a workplace pension scheme your employer will be obliged by law to help you save for your retirement. Each time you pay into your pension your employer does as well, thus increasing the amount that goes into your fund.

If you choose not to join your employer’s scheme you will miss out on your employer’s contributions and be turning down extra money for your retirement.

Essentially, pensions are an extremely efficient way of saving money for your future retirement income, especially when you combine employer contributions, compound interest, and tax relief payments.

Compound interest

Early pension contributions allow you to get the full benefit of compound interest, which means that even small savings early can be more beneficial than larger savings later.

In simple terms, compound interest is like earning double interest, the compounding effect occurs when you earn interest on both your savings and the interest that your savings have generated. The longer the compounding effect gets to work, the more you accumulate in your pension fund.

The amount of compound interest you receive depends on the performance of your pension investments. Just like all investments, pensions are subject to change depending on how they perform in the stock market and can go up or down.

Market fluctuations

Pensions are a long-term investment, and during the lifetime of your pension, market fluctuations will influence your funds.

Things like world events such as pandemics or wars can cause dramatic stock market changes. Usually, these fluctuations will even out over the longer term, but there are no guarantees.

Just like all investments, pension values can go down as well as up, meaning that you could get back less than you invested.

Get expert advice

Often, people delay saving for the long term because they think they don’t earn enough for it to make a difference. However, the truth is that even paying a small, regular amount into your pension could make a substantial difference to your future finances and retirement income.

Also, if you do delay things for several years, you will have to contribute a higher monthly amount to your pension to get the same results that as if you had started paying into your pension earlier.

So, by starting sooner rather than later, you will be doing your future self a favour.

If you need help in starting a pension. Let Regulated Advice match you with a financial advisor for expert advice.