SAVING just £100 a month in your twenties can build up a pension pot worth £321,800 towards your retirement.
This is partly because you get a government boost in the form of tax relief, which helps to build your savings faster, and partly because your pension will be invested, meaning you should enjoy growing returns over time.
Even saving smaller amounts can have a massive impact on your financial future.
For instance, data compiled for the Sun by Aegon shows that a 22 year old who saved just £50 per month until state pension age could build up savings of £160,900.
This is despite only paying £27,600 of their own money into the scheme – meaning £133,300 built up in tax relief from the government and moderate investment returns.
Of course, saving more means an even bigger pot. For instance, a saver who puts away £150 a month can build a pot worth £482,700.
Of this, just £55,200 is cash contributions, compared to £427,500 in returns and tax relief.
Meanwhile saving £250 per month could give you a whopping £804,500. And if you wanted to build a million pound pension, the magic number to save is £310.75 each month.
The later in life that you start saving, the more money you have to find from your disposable income to build up an equivalent pension pot.
This is because pensions benefit from compound interest, where your investment returns are continually reinvested.
This means your fund grows exponentially – so smaller savings earlier on are worth the same or more than bigger cash injections later.
Steven Cameron, pensions director at Aegon said: “Someone starting saving at 22 will have a state pension age of 68 so has 46 years over which to enjoy investment growth.”
Zoe Dagless, financial planner at Vanguard added: “If your pension savings grow at 5% a year, £1,000 invested at age 30 would be worth £6,385 by age 68.
“But if you invested £1,000 at age 40, this would allow less time for your money to grow and, using the same assumptions, it would only be worth £3,920.
“£1,000 you invest at age 50 would only be worth £2,406. Giving your savings the time to grow and compound makes a huge difference in the long run.”
We spoke to pensions experts to find their top tips for getting saving early to help build the best possible pension pot.
Save into a pension scheme
Putting your money into your pension means you attract tax relief, which gives your funds a substantial boost.
Mr Cameron said: “If you pay into a pension, the Government gives you a tax relief top-up linked to whatever rate of income tax you’re paying.
“For a basic rate taxpayer paying 20% income tax, £50 becomes £62.50 overnight and £100 becomes £125.”
This automatic top up is more than you’d get in interest on a savings account, and it comes before investment returns.
Use your employer company scheme
If you qualify for auto-enrolment and save into a company scheme then your employer will have to make extra pensions contributions on your behalf.
This is on top of the tax relief you get from the government.
Under the current rules, if you contribute 4%, your employer has to pay in an additional 3%.
To automatically qualify for auto-enrolment you must be over 22 and earning a salary of at least £10,000 each year from one employer.
Save earlier if you can
Even though you don’t automatically qualify for auto-enrolment if you are under 22, you can still choose to join the scheme.
This is well worth doing, firstly because it gives you longer to benefit from investment returns, and secondly because it will get you those employer contributions earlier.
You can voluntarily opt in and get the free boost from the company you work for as long as you are earning above £6,240 per annum.
Nathan Long, a senior analyst at Hargreaves Lansdown said: “There are a number of tips for younger pension savers… However, the biggest opportunity lies with those aged under 22.
“The pension rules ignore these people, so they won’t be automatically put into their employer’s scheme, but if they ask to join their employer has to sign them up and make a contribution on their behalf if they’re earning enough.
“It’s easily overlooked, but that opportunity for extra money from your employer is not one to miss.”
Save a little if you can’t afford a lot
While it can be harder to find spare money to put away when you are young, the power of cumulative interest means that your savings now soon stack up.
Most people find that they older they get, the more they can afford to put away, and those extra savings later are valuable too.
But putting just £20 or £50 each month aside in your early twenties can make a huge difference over all.
Anthony Morrow, co-founder of OpenMoney said: “A common misconception is that you have to be saving hundreds each month, but you can start with something as simple as £10 to get you into the habit.
“If you set up a standing order on pay day it will come straight out your account and you won’t even miss the cash. Everything you save now will help you out at a later date.”
What are the different types of pension?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (Sipp) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it so it’s compulsory for employers to automatically enrol you in your workplace pension, unless you choose to opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions rose to 8% in April 2019, with employees now paying in 5% (1% in tax relief) and employers contributing 3%.
- Final salary pension – This is a also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year on retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £179.60 a week and you’ll need 35 years of national insurance contributions to get this. You also need at least ten years’ worth of national insurance contributions to qualify.
- Basic state pension – If you reached the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £137.65 per week and you’ll need 30 years of national insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up national insurance contributions under both the basic and new state pensions will get a combination of both schemes.
Check for employer matching
Lots of companies offer a generous perk called matching which can help you build your pot far more quickly.
This means that if you choose to put extra cash into your pension above the minimum auto-enrolment levels – the firm promises to put more money in too.
This is basically free cash so if your firm does offer matching you should try and make extra contributions. If you don’t, the employer won’t either and you’ll miss out on the money.
Mr Cameron said: “Some even offer to match you £ for £ so your £50 increases to £62.50 [with tax relief] and then could double to £125 – which must be one of the best financial deals out there.”
Increase your risk levels
The growth data from Aegon is based on investment returns of 5%, which is considered a moderate return.
When you are younger, you can afford to take on more ‘risk’ to get the benefit of volatility in the markets.
Lots of workplace pensions do this automatically, changing the way you are invested over time as you approach your pension age.
But some experts say it may be worth seeing what investment options are available in your scheme and seeing if you can take a higher growth approach.
Mark Ormston at Retirement Line said: “Whilst being younger, it is typically a good move to not go with the standard investment offering and instead select a more ‘adventurous’/ higher risk fund.”
Nick Sargeant, Financial Adviser, Hoxton Capital Management added: “Typically, when it comes to investing, ventures that are more volatile have the highest return on investment. Investors, who have the time to recover if something were to go wrong, have the opportunity to make riskier moves.”
When can I retire?
IF you’re wondering when you can retire, it’s best to speak to your pension providers.
Don’t rely on auto-enrolment alone
One worrying trend is that because people have been auto-enrolled, they think their financial future is taken care of.
Unfortunately, the amounts set aside in auto-enrolment are unlikely to be enough for a comfortable retirement for most people.
David Gibb, a chartered financial planner at Quilter said: “If a 25 year old on a current average annual UK salary of £28,700, remains in a similar role and is auto-enrolled until the age of 68, they might expect to receive a retirement income of around £5,600 per year in real terms.
“This works out to be a terrifying 60% shortfall in the amount of money they can expect when they enter retirement compared to those retiring today.”
Sarah Coles, personal finance analyst at Hargreaves Lansdown added: “As a rough rule of thumb you should be aiming to contribute around 12.5% of salary each year, but if this looks like a terrifyingly massive chunk of your income, don’t panic and give up.
“The aim at this stage is simply to put in as much as you can afford to contribute, as soon as you can afford to do so. You also need to make sure you come back and revisit how much you can afford each year.”
Keep saving even when circumstance change
There are lots of life triggers that can cause people to stop paying into their pension, whether that’s maternity leave or saving for a house deposit.
However, if at all possible you should try to keep putting cash in, even if it’s just small amounts.
Mr Morrow said: “In your 30s, you may see your money stretched as your responsibilities grow. This could present tough financial choices. But if you want to make cutbacks, it’s often agreed that your pension should be the last place to look.
“By stopping or reducing your pension payments you miss out on three things: the tax benefits they bring, contributions from your employer, and potential investment growth over time.”
“If it’s necessary, a short-term reduction in the amount you save in your pension will have less effect on your pension than stopping completely.”
Top tips to boost your pension pot
DON’T know where to start? Here are some tips from financial provider Aviva on how to get going.
- Understand where you start: Before you consider your plans for tomorrow, you’ll need to understand where you stand today. Look into your current pension savings and research when you’ll be eligible for the state pension, and how much support you’ll receive.
- Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too.
- Take advantage of online planning tools: Financial providers Aviva and Royal London have tools that give you an idea of what your retirement income will be based on how much you’re saving.
- Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement.
Make savings elsewhere to fund your pension
Saving when you’re young can be terrifying, particularly if you’re facing low starting salaries and extortionate city rents.
One way to fund contributions is to look for ways to save elsewhere, whether that’s cutting back on coffees or trimming your electricity bills.
Ms. Coles said: “The easiest way to free up cash for pension contributions is to avoid overpaying for boring things like bills. You should be able to shop around for everything from gas and electricity to media packages and mobile phones, and shave a small fortune off the cost.
“Check your direct debits too, and see if there’s anything you can cancel without noticing too much. You might be surprised how easy it is to shave your spending without sacrificing anything you really value.”
Don’t forget the state pension
For most people the state pension is a welcome boost to retirement funds.
The full new State Pension is currently worth £179.60 per week, which adds up to just over £9,350 a year – and the amount goes up each year.
But you need at least 10 qualifying years on your national insurance record to get any state pension at ALL, and you need 35 years worth to get the full lot.
You can get credits if you’re out of work and receive certain benefits.
For instance, if you claim child benefit, Jobseeker’s Allowance, Employment and Support Allowance, Statutory Sick Pay or Maternity Pay / Allowance.
You can find out about which benefits get you credits on the government’s website.
You may also be able to make voluntary contributions to fill any gaps in your state pension record. You can see your state pension forecast and look for any gaps here.
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