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.
This article looks at why it could pay to pay into a defined contribution pension plan early. Find out more about the different types of pension.
A defined contribution 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 (not including tax relief). Based on current tax rules, after 10 years your could have received £4,500 tax relief in your pension (if you're a basic rate tax payer) and after 20 years it could be £9,000. Please note, depending on how your pension scheme works you may not get tax relief if you do not pay tax.
This example shows how much a basic rate tax payer might get in tax relief. Higher and additional rate payers may be able to claim even more. There are limits on how much you can benefit from in pension contributions without incurring a tax charge. Your tax treatment depends on your individual circumstances as well as tax rules, which are subject to change.
2. Extra contributions from your employer
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 may be missing out on contributions from your employer.
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. Remember that the value of your policy can go down as well as up and you could get back less than invested.
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 could 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 could make a big difference to your future finances.