Pensions for young adults: why starting early is crucial for your retirement savings
By Alan Boswell Group
If you’re a young adult, a pension – perhaps more than any other financial product – can seem like something you don’t have to worry about for a long time.
After all, retirement is some way away; so it’s easy to take the view that thinking about a pension can wait for a bit longer.
But the sooner you start saving for later life, the more comfortable a retirement you can enjoy – and you might even be able to retire early.
Why should I start a pension plan now, and how much will I need?
Starting a pension plan early in your working life has several benefits.(In fact, parents can set up a pension for children so they can start saving as soon as they’re born.)The State Pension will provide some income for you in retirement, as long as you’re up to date with your National Insurance contributions, but it’s unlikely to be able to fund your retirement lifestyle on its own.
According to the Pensions and Lifetime Savings Association, even just a moderate standard of living in retirement for a single person would require an annual income of more than £23,000 a year. The figure for a couple is £34,000 a year. If you want the freedom to take longer holidays and make regular gifts to your grandchildren, the amount you’ll need could be even more.
So it pays to think about what other provisions you can make. One of the best ways to improve your prospects for later in life is through your workplace or private pension.
Here are some ways they can help set you up for retirement.
Tax relief
You get tax relief on the money you save, and that tax saving is added to your pension pot. Assuming your marginal tax rate is 20%, saving £100 a month through a workplace pension, will only lose £80 a month from your salary because the Government pays in £20 in tax relief.
If you’re self-employed and you have your own private pension, you can claim back the tax through your self-assessment form.
Employer contributions
If you pay into your pension through a workplace scheme, your employer will also contribute. The minimum employer contribution is 3% of your total earnings; this is money you wouldn’t otherwise receive in your pension pot.
Some employers will offer a salary sacrifice pension, where contributions are deducted from your gross pay instead of your net pay. This can also lower the amount of income tax and National Insurance you pay.
Compound growth
When you save into a pension, your money is invested in various places, which have the potential to grow and also to generate returns, such as dividends, interest on bonds, and interest on cash funds.
The returns are added to your savings pot – which will then have the potential to grow and to generate returns. This compound growth continues over many years, and the additional returns it generates can be significant.
Pound-cost averaging
By investing regularly over a long period, you have the potential to smooth out any investment peaks or troughs.
If you invested all your money in a lump sum and your investments then fell, your pension pot would shrink – at least in the short term. But by spreading out your saving, you’re spreading your investment over the full market cycle, allowing you to “buy” more for your money when markets are low.
You might get fewer massive spikes in the value of your pension fund, but you’ll be better protected from huge dips, too.
Having longer to save
It might sound obvious, but the earlier you start saving, the more time you’ll have to build up a large pension pot to help you live a comfortable retirement.
Avoiding a shock later on
It will soon become your norm if you start saving a regular amount into a pension early on.
If you have a workplace scheme and get a pay rise, your contributions to your pension (and those by your employer and the Government) will increase.
On the other hand, if you don’t start a workplace pension until later on in life, it might feel like you’re taking a pay cut because you’ll suddenly see a fall in your take-home pay, and you’ll have to start finding money to save that you’d previously been able to spend.
Lower contributions
If you delay saving for a pension, you’ll probably have to pay in a lot more each month to get to where you’d have been if you had started early.
You won’t have enjoyed the benefit of compound growth, and you’ve got much less time to build up the savings pot you’re aiming for.
Starting early, however, means you can pay in less for longer and still see the benefits when you retire.
Retiring early
Starting to save early doesn’t just give you a better chance of a comfortable retirement – it also increases the chance of being able to retire early.
The sooner you start, the more likely you’ll be able to retire early and enjoy the advantages of your disciplined pension planning.
How can I save for old age?
When it comes to saving for a pension, there are some basic steps you can take that should make the whole process much easier.
Set your goal
An independent financial adviser can help you with this. Your goals and plans in life can change, but it’s worth speaking to an experienced expert who can help you decide what sort of retirement income you want to aim for.
You can always tweak your plans and strategy later on, but having a goal is important.
Work out your budget
Work out what you can afford to save. Don’t overstretch yourself, and consider your current financial commitments plus other life stages you may want to save for, such as a deposit for your first property.
Workplace pension options
If you are enrolled in a workplace pension, you may be able to increase your contributions. A strategy often used is to increase your contributions by 0.5-1% every time you get a pay rise.
Consider a LISA
If you want to save for your first property and you’re aged between 18 and 40, you can open a Lifetime ISA (LISA). You can pay up to £4,000 a year into a LISA, and the Government will top it up with a bonus equivalent to 25% of what you save.
You can keep contributing until you turn 50, so you can get up to an additional £32,000 from the Government if you pay in the maximum amount from when you turn 18.If you don’t use the money for a deposit on your first home, you’ll have to leave it in the LISA until you turn 60 (unless you are prepared to pay a penalty for early withdrawal), so a LISA can be a way of putting aside money for later life.
Stick to your plan
The sooner you start saving for a pension, the better your options will likely be. Once you’ve done the hard work by starting your pension saving, try to maintain discipline and keep putting away regular amounts.
If your life goals change, speak to an independent financial adviser who can help you with your options.
What happens when you start saving from a younger age?
There are no guarantees with any sort of investing, but by starting to save for a pension at an early age, you have a number of things in your favour.
Your money has a lot longer to grow and can benefit from compound growth. You’ll be at less risk of suffering from big market shocks as your money will be invested over a long period. Even if there are fluctuations, you should have plenty of time for your investments to recover.
Next steps
Thinking about retirement planning and starting a pension is among the most important financial things you can do.
At Alan Boswell Group, we have friendly, experienced independent financial advisers who can guide you through every stage of the process, including helping you work out how much you need to retire.
Make an enquiry
Please note, the value of an investment and any income from it can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.
The value of tax benefits depends on your individual circumstances and the laws concerning these can change.