Pensions: start early, be consistent

A pension is something we all will need later on in life but it is not something that we all contribute actively towards. We save up for a car, the house or holidays, but rarely do we give our pensions the same attention. Why is that?

“I want to enjoy today, I might get hit by a bus tomorrow.”

While I get the sentiment it is nonetheless a very poor plan. While yes you may get hit by a bus tomorrow, what if you don’t and you live to good old age; what will you live off? It doesn’t need to cost a lot to start saving into a pension and if you start early time will do most of the effort for you through compounding interest.

“I’m too young to think about a pension”

When you are young and starting out in your working life if precisely when you should start thinking about your pension. I know its not cool and you would rather put money towards your first house you will be thankful for it later on in life. If you start saving at 20 towards your pension you could have considerably more in your fund that someone who started at 45 putting in more.

Workplace pensions

In the UK employers are required to enrol you into a workplace pension scheme, that is unless you don’t meet certain requirements or you opt out (Don’t opt out). This means that the government has made it easier than ever for the average person to start saving for their retirement.

A workplace will have one of two different types of pension schemes: a defined contribution scheme, or a defined benefit scheme. A defined benefit scheme is a pension scheme that will give you a regular salary during your retirement after both you and your employer have been contributing to it during your working life. This is sometimes known as a final salary scheme and has become less common due to the high cost of providing these schemes. A defined contribution scheme is one where the total fund consists of contributions made by yourself and your employer and the final fund value is dependent on how much you have contributed and how the fund has performed over the years. This is now the more common type of fund.

How much should you save for a pension

If you are part of a workplace pension scheme the legal minimum you and your employer must contribute is 5% and 3% of your salary respectively. Some employers may offer a contribution match to a higher percentage, which I would strongly recommend contributing to. You will also get tax relief from the government at a rate of 20% of contributions which will be claimed by your provider and added to your fund.

So if every month you put in £40 and your employer puts in £30, you will also get tax relief of £10. That would be a total of £80 a month or £960 a year. Also it is done automatically on your pay check so you don’t need to actively worry about it. If you opt out of a workplace pension scheme you will not get any employer contibution which is an effective pay cut.

There is no once size fits all approach to how much you should save towards your pension as everyone’s circumstances are different. So my approach is to save as much as I am comfortable with according to my financial goals. I contribute to my workplace pension but I also have an ISA for additional contributions which I also intend to use towards my retirement.

What about the state pension?

The state pension, or social security retirement benefits in the USA, is money you receive from the government when you reach state pension age. In the UK this is currently 68 but may increase. Currently if you qualify for the full pension you could receive £175.20 per week (£9,110.40 per year). This is a decent amount on money but for me there are two issues with it. First, I would like to retire earlier that 68 years old. Second, while this is a decent amount it probably won’t be enough to live comfortably.

My view on the state pension is that it should supplement your retirement finances but certainly not be your core source of income. Hopefully by taking this approach I will be able to save a decent retirement fund to help have a comfortable life post 60 years of age.

 

None of the content in this article should be considered financial advice, I am not a financial advisor and you should always do your own research prior to investing. These are my opinions only.

 

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