However, starting a pension in your 20s or early 30s can make a significant difference to your future financial security. Here’s why you should start planning for retirement sooner rather than later.
1. Compound Growth
One of the most compelling reasons to start a pension early is the power of compound growth. When you invest in a pension, the returns you earn are reinvested, helping your money grow over time. The longer your money is invested, the more significant this growth becomes. Starting early means your pension pot has more time to benefit from compound growth, potentially turning small contributions into a substantial sum by the time you retire.
2. Tax Relief
In the UK, pensions come with attractive tax benefits. For every contribution you make, the government adds tax relief. For basic rate taxpayers, this means that for every £80 you contribute, the government adds £20, making your total contribution £100. Higher rate taxpayers can claim even more relief. This tax relief makes pensions one of the most tax-efficient ways to save for retirement.
3. Employer Contributions
If you’re employed, it’s likely that your employer will contribute to your pension through a workplace pension scheme. Under auto-enrolment rules, employers must contribute a minimum of 3% of your salary, provided you contribute at least 5%. This effectively means you’re getting free money from your employer, so it’s worth taking full advantage of this benefit.
4. The Earlier You Start, the Less You Need to Contribute
The great thing about starting a pension early is that you won’t need to put away huge sums of money each month to build up a decent pot. The earlier you start, the smaller your monthly contributions need to be to reach your retirement goals. For example, someone who starts saving for a pension at 25 will need to contribute far less each month than someone who starts at 40 to reach the same retirement income target.
5. Life Expectancy Is Increasing
With people living longer, it’s essential to have enough saved up to ensure you can enjoy a comfortable retirement. Starting your pension early gives you a better chance of accumulating the savings you’ll need to support yourself in later life. By building your pension pot over several decades, you can avoid the stress of having to make large contributions later on.
6. Flexibility in Retirement
Pension savings can offer flexibility in how you access your money once you retire. Since the introduction of pension freedoms in 2015, UK pension holders can take up to 25% of their pension pot as a tax-free lump sum once they reach 55 (57 from 2028). The rest can be used to buy an annuity or remain invested in a drawdown account. This flexibility allows you to tailor your retirement income to your personal needs.
By starting a pension early, you’re giving yourself the best chance to build a secure and comfortable future. Even small contributions can add up over time, and with the added benefits of tax relief and employer contributions, there’s no reason to delay.
Contact us to arrange your first conversation with a Financial Advisor.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Approved by The Openwork Partnership 17th September 2024
