It can be hard to think about retirement when it’s almost half a century away. But all those decades can be a huge help when it comes to growing your pension.
That’s why it’s always worth looking past your short and mid-term savings goals, like your first home, a new car or just cost of living increases. If at all possible, it’s very important to regularly put even just a little money away for your later life too.
Why it’s important to start saving into your pension early
Pensions are designed to be long-term investments – in fact, your pension will probably be the longest investment you make in your lifetime.
So the earlier you start saving the more time and opportunities your investments have to ride out any market ups and downs, and grow. You could end up with more money in your pot by the time you retire.
Let’s see how that can work in practice.
- Anita starts saving £100 a month into her pension at the age of 22 – that’s when most people are first auto-enrolled into one
- Basid decides to put off saving for a bit – he waits until he reaches 40, when he starts saving £200 a month into his pension
Then let’s assume that, over the years, Anita’s and Basid’s pension savings both enjoy an annual growth rate of 5%. Note that we’re using a fixed growth rate for illustrative purposes only – in real life, they change all the time. For simplicity’s sake we’re also not factoring in inflation.
So Anita and Basid keep paying into their pensions while living rich and satisfying lives, until both turn 65 and retire. At that point:
- Anita’s pension savings will have grown to £175,500 after she saved a total of £51,600
- Basid’s pension savings will have grown to £117,000 after he saved a total of £60,000
Putting it another way, Basid will have saved £8,400 more than Anita into his pension – but he’ll end up with £58,500 less than her when he retires.
That’s because, even though Basid saved £100 more than Anita each month, his savings have had 18 years less to grow. So her investments have had more time to ride out and even take advantage of market ups and downs. She’ll have acquired less when markets were up but more when they were down. The value of those less costly acquisitions will also have grown with any market growth. When you come to think about where to invest your pension pot, stock market investments offer the potential for greater growth over that of savings accounts, in the longer term.
And don’t forget that we’ve simplified this example to show you how an earlier start can make a big difference. When you’re working out how much to save into your own pension, you’ll need to factor in inflation. You should also be ready for your pension’s growth rate to go up and down as markets rise and fall – in the real world, pension growth rates are never either fixed or guaranteed.
Of course, you can’t just rely on saving early to grow your pension. You still need to check that your pension investments match your retirement goals. Pension fees and charges can also impact how much it grows. And as with all investments your pot’s value will go down as well as up, so you might get back less than you put in.
How much should I pay into my pension?
It can be hard to know where to begin when it comes to pension contributions. We look at what to think about when you're deciding how much to pay into your pension.
Other benefits of saving into a pension
- The earlier you start saving, the more you’ll end up with. That gives you more flexibility when it comes to retiring on your terms – especially as the State Pension age goes up.
- The power’s in your hands. Although you can’t start taking your money out until you’re in your mid-to-late 50s, you have a lot of control over how it’s invested before then.
- Because it’s such a long-term investment, you should feel able to avoid any rash decisions and ride out any short-term market swings, safe in the knowledge you won’t be cashing it in for decades.
- Pensions are a very tax-efficient way of saving. And you could get help from your employer - they’ll top up anything you put into a pension – or the state will add tax relief. This can help cut your total tax bill and boost your retirement savings.
- Pensions are an employee benefit. Auto-enrolment regulations mean that your employer has to add at least 3% of your salary into your pension. Some employers pay that much only, others pay more. If you’re not sure what yours does, it’s well worth finding out.
Take a look at your financial commitments and general savings goals. Then:
- If you’re already saving into your pension, congratulations! But can you put a little more away each month? And check that you’re making full use of any matched contributions from your employer – if not, again see if you can up your own payments to get more from them.
- If you’re not investing in a pension, take a good look at your finances. Now you know the benefits of starting to save into a pension early, doesn’t it make sense to begin saving even just a little?
And if you want to read a little more about this and related topics, you can check out: