Pension saving on a budget
7. I can’t afford to put a lot in, so it’s not worth it
- A little saved over a long time can go a long way, thanks to the long-term wonders of compounding.
- Compounding is what happens when your investment’s growth in value stays invested and itself starts growing.
- It ratchets up the impact of annual growth and can have a surprisingly big impact over the years. Let’s look at a practical example:
- Imagine that you invest £1,000. Then imagine that your investment grows by 5% a year for the next 20 years.
- In its first invested year, your £1,000 will grow by £50 to £1,050. That extra £50 will then itself grow, so in your second invested year your money will grow by £52.50 to £1,102.50.
- Those may not seem like very big numbers. But over the years they’ll build up. So at the start of your tenth invested year, you’ll have £1,551.33, which will grow by £77.57. That’s 50% more growth than in your first year.
- Fast forward 20 years and your first contribution of £1,000 will have turned into £2,526.95. In its final year it will have grown by £120.33 – more than double its original growth. And all without you investing any more money.
- Now imagine that you have invested more money every month and it too has been compounding. It too will have grown and grown again!
- And that’s why, over the long term, even saving small regular sums can have a big impact.
- This example shows how compounding growth works. Your pension might not grow in the same way, and charges will impact how much it grows. It's also an investment, which will fall as well as rise in value.
8. I’m not earning enough to get a pension
- Only workers earning £10,000 or more get automatically enrolled into workplace pensions. But you can ask your employer to enrol you if you’re earning less, and usually stop and start paying into it whenever you want to.
- If you’re self-employed and have a personal pension there’s no minimum amount you can pay into it – and again you can stop and start paying whenever suits you
Alternatives to workplace and personal pensions
9. Why am I even worrying? The State Pension will sort me out…
- Just now, the most you can get from your State Pension is about £11,502.40 a year. If you haven’t paid National Insurance for the full 35 years you’ll get less. That might not give you your ideal later lifestyle, so it’s always a good idea to have other pensions too.
- If you’re not sure how much your ideal retirement lifestyle could cost, visit the Retirement Living Standards website. It’ll help you work out your later life budget.
10. I’d rather put my money into an ISA or save for a house
- Then go for it – investment diversity is a great idea! But be sure to keep saving for the long term. We wouldn’t recommend switching your pension payments into shorter term, possibly less reliable ways of saving.
- A little research and forward planning can make a big difference here. Make sure you understand how each investment works, any risks involved, what sort of return you might get and if it’ll help you hit your savings goals.
Your two bonus retirement goals myths
11. I’ll lose the money by the time I retire
- Historically, stock market investments have tended to outperform money held in savings accounts. So hopefully that and the magic of compounding will leave you better off.
- Any money you put into your pension is yours and will be waiting for you later on. Of course, its value could go down as well as up over the time you invest.
12. That’s all so depressing! I’ll be working until I’m 70, 80 or 90 at this rate! What can I do?!?
- If you’re worried about that, then all the more reason to start saving now. The longer you’re saving for, the more you can invest and the more time you give your pension pot to get to where it needs to be. Even saving just a little now can make a big difference later on.
- You don’t have to wait until you’re 70 plus to access workplace or personal pensions – from April 2028 on, you can access them once you turn 57 (it’s 55 plus until ‘28). That could help you stop working or at least work less at a younger age.
- Assuming you’ve paid enough National Insurance, you’ll start getting your State Pension once you reach your late 60s. At the moment it kicks in when you’re 66, but that’s going up to 68 in a few years.
Are pensions worth it?
The cost of living crisis has made many of us focus on our short and mid-term financial security. But paying into a pension is an action you can take right now that helps secure your long term finances. And when you do it, you’re likely to get help from your employer, the government or both.
That’s why we always say yes. Pensions are always worth considering.
