When you start your career, saving for retirement isn’t likely to be a priority. But more young people are saving into a pension than ever and it pays to understand what it means for your future.
Whilst you might have left your 20s behind, you may have children or grandchildren that are finding their feet when it comes to the world of work and pensions. The sooner they start saving into a pension and taking an interest in what it means for their later years, the better.
The good news is that auto-enrolment has helped more people in their 20s start saving for retirement. Prior to the introduction of the reforms in 2012, just 24% of private sector workers aged between 22 and 29 were saving into a pension. Today, more than eight in ten (84%) are, according to figures from The Pensions Regulator.
Darren Ryder, Director of Automatic Enrolment at The Pensions Regulator, said: “It’s terrific that the chance to save has been opened up to millions more people who may not have otherwise set up a pension. In years to come, young people in their twenties who started saving today will reap the reward of a retirement they can look forward to.”
All employers must now automatically enrol eligible employees into a Workplace Pension. You are eligible if you:
Are aged between 22 and the State Pension age
Earn at least £10,000 per year
Normally work in the UK
You can choose to opt-out of a Workplace Pension. However, this often isn’t in your best interest when you consider the long-term, due to employer contributions, tax relief and investment returns.
So, if you’re in your 20s and just starting to build up a pension, how do you make the most of it? There are several things you can do to secure a comfortable retirement.
1. Understand your current contributions
The first step to take when getting to grips with your pension in your 20s is to understand exactly what’s going into your pension. The minimum contribution is 8% of pensionable earnings, which for basic rate taxpayers is made up of several different areas:
Your own contributions (employee contributions) will be 4% of your pensionable earnings under auto-enrolment
You'll also receive tax relief on your contributions of at least 20%, adding a further 1% of your earnings to your pension
Employers must also contribute a minimum of 3% to your pension
Higher rate taxpayers can receive additional tax relief, although whether this is paid directly into your pension or whether you need to reclaim it from HMRC will depend on how your payroll is set up.
The combination of the above three areas means your pension savings are likely growing at a faster pace than you think. One important thing to keep in mind is that the above contribution rates for employees and employers are the minimum amount. You can choose to increase your contributions and some employers may also offer a higher rate as part of your benefits package.
2. Set goals for your retirement
Retiring could be more than four decades away so it might seem a little early for setting goals. However, a target can help keep your retirement savings on track and provide direction when you’re making decisions.
Having a general idea of when you’d like to retire and the type of lifestyle you hope to achieve can give you a broad figure you want to have in your pension when the time comes to access it.
Remember, the retirement goals you make now aren’t set in stone. Reviewing your plans and being flexible is important. As well as personal circumstances, factors such as the State Pension age or regulation around when you can access pensions may have an impact on plans.
3. Calculate if you’re saving enough each month
The good news is that the younger you start saving the less you have to contribute each month to meet your goal. By starting in your 20s, you’re on the right path to securing the retirement you want.
However, the minimum contribution levels under auto-enrolment are unlikely to be enough to maintain your lifestyle. So, making additional contributions or provisions, with your goals in mind, may be necessary. You can add either one-off payments or regular payments to your pension.
If you’re unsure how to calculate how much you need at retirement and how this translates to contributions made now, please get in touch. We’ll work with you to give you confidence in the positive steps you’re making now.
When making additional contributions, it’s also important to keep in mind the annual allowance and lifetime allowance. Exceeding these could mean that saving into a pension is no longer tax efficient.
4. Look at the default fund and your other options
Pensions are typically invested. This gives your savings a chance to grow over the long term. All investments come with some level of risk and during the time you pay into a pension, you will see the value of your savings rise and fall.
Pension providers will offer a range of different investment funds for you to choose from, covering a range of investment risk profiles.
If you haven’t chosen a fund, you’ll automatically be investing through the default option. However, this may not be the right one for you, particularly given that you’ll be investing with a time frame that spans several decades.
It’s worth reviewing the different fund options and their performance over the long term when deciding where to place your money. Even a slightly higher return over a long period can make your retirement more comfortable and enable you to achieve your dreams.
5. Keep an eye on your pension
Once you have set regular contributions and understand how it’s invested, don’t just leave your pension. Keeping an eye on performance and how it aligns with goals is just as important as the initial steps.
When you’re young, you’re more likely to swap jobs on a regular basis as you climb the career ladder. This can mean you end up with several different pensions you need to keep track of. For some, it may be worth consolidating them to make this easier. However, be sure to check the benefits, returns and fees of the different pensions before making a decision.
Balancing your pension with other goals
One of the challenges of saving into a pension when you’re in your 20s is that you often have other, conflicting priorities. You may be focused on paying off debts accumulated whilst studying or putting aside money to buy your first home. As a result, adding to a pension can fall by the wayside.
But balancing goals is important to achieving short, medium and long-term aspirations. Choosing short-term goals at the expense of your future can mean you fall short in the future. Your financial plan needs to consider all your goals, whether they’re just around the corner or several decades away. It can be difficult to understand where your savings are best placed; this is an area we can help with.
If you’d like to discuss your pension, whether you’re in your 20s or approaching retirement, please contact us. We’re here to help you understand how your retirement savings can create an income and what this means for your lifestyle.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation which are subject to change in the future.