You know the old saying, “the early bird gets the worm”?
Well, that’s very much the case when it comes to your pension.
Let’s say you started one at the age of 33 and invested a hundred-and-fifty pounds a month in it.
If your pension pot grew at 2.4% a year, after taking inflation and charges into account, you could have around a hundred-and-six-thousand pounds in it if you retired at 68.
But what if you started when you were ten years younger? If you did that, you could end up with around a hundred and fifty thousand in your pension pot.
That’s around forty-four thousand pounds extra in your retirement nest egg… yet you’ll only have paid in eighteen thousand more yourself.
Of course, this is only an example, and the actual rate of any growth can’t be guaranteed. Like most investments, the value of your pension can go down as well as up and you could get back less than invested.
The reason starting early can be such a good idea is partly thanks to the magic of ‘compounding’ – which is where any investment returns you make can themselves earn returns. Combined with the extra money you’ve paid in yourself, it can make a big difference to the amount you end up with.
And the sooner you start, the bigger the effect can be.
When you’re young, it can be hard to think about the future. But if you want to boost your chances of a better retirement, starting your pension early is a bit of a no-brainer really. Well, unless you’re a real bird brain.
When you’re younger, it can be tempting to put things like starting a pension on the back burner. After all, retirement’s ages away, right? But by delaying just a little, you could be losing out a lot
A pension plan is a long term investment and you normally can’t access any benefits until you are 55. The value of investments can go down as well as up, and you may get back less than invested.
Here are four reasons why you might want to think about starting yours sooner rather than later:
1. More tax relief from the government
The sooner you start your pension, the more you’ll receive in tax relief. For every 80p you pay in, the government adds 20p – boosting your total contribution to a pound. And while that might not sound a great deal, it can really add up. For example, let’s say you started your pension at the age of 23 and paid in £150 a month. You could get £4,560 more in tax relief than if you’d waited 10 years (if you’re a basic rate tax payer). And £9,120 more than if you’d delayed for 20 years.
This example shows how much a basic rate tax payer might receive get in tax relief. Higher and additional rate payers may be able to claim even more. Your tax treatment depends on your individual circumstances as well as tax rules, which are subject to change.
2. Extra contributions from your boss
On top of tax relief, if you’re in a workplace pension scheme, there’s a good chance your employer will be obliged by law to help you save for your retirement. So if you put off joining the scheme for whatever reason, you’ll be missing out on contributions from your boss.
3. More time for your money to potentially grow
The money in your pension pot doesn't just sit in a vault somewhere, gathering dust. Instead, it's invested. This means it has the potential to grow over time. And the earlier you start your pension, the more time it has to do this.
4. Avoid getting hit in your pocket later on
Finally, if you do put things off a few years, there’s a good chance you’d have to pay a higher amount into your pension each month to achieve a similar result to that if you’d started sooner. So by starting earlier, you’ll be doing your future self a favour.
Taking the first step
People sometimes put off saving for the long term because they think they’re not earning enough to make it worthwhile. Yet the truth is, even paying a small, regular amount into your pension can make a big difference to your future finances.
Need a hand with your retirement plans?
Learn more about getting your retirement plans in order, from budgeting effectively to picking your investments.