When you first start your career, saving for your retirement won’t be on your list of priorities. However, more young people today are saving into a pension than ever and it pays to fully understand what it means for your future.
Whilst you may have left your 20s behind, you could have children or perhaps grandchildren that are finding their way when it comes to the big world of work and pensions. The sooner they start putting money into a pension and taking a firm interest in what it means for their future, the better.
Auto-enrolment has now helped more people in their 20s start saving for retirement. Prior to this being introduced in the reforms in 2012, only 24% of private sector workers aged between 22 and 29 were paying into a pension. Today, 84% of people the same age are paying into a pension.
New laws state that all employers must now automatically enrol eligible employees into a Workplace Pension. You fall into this category if you:
- Are between 22 years of age and the State Pension age
- Earn at over £10,000 per year
- Usually work in the UK
You can decide to opt-out of a Workplace Pension. However, this is considered to not be in your best interest when you consider the long-term, due to employer contributions, tax relief and future investment returns.
So, if you’re between 20 and 30 and just starting to build up your pension, how do you get the best put of it? There are several things you could do to ensure a comfortable retirement.
Table of Contents
1. Know What Your Current Contributions Mean
The first step you should take when getting to grips with pensions in your 20s is to understand exactly what’s being paid into your pension. The minimum contribution is 8% of earnings, which for basic rate taxpayers is built up of several different areas:
- Your contributions (employee contributions) will be 4% of your pensionable earnings with auto-enrolment
- You will also receive tax relief on your contributions of at least 20%, adding another 1% of your earnings to your pension
- Employers must also contribute a minimum of 3% in to your pension
Higher rate taxpayers could receive additional tax relief.
The combination of these areas means that your pension savings are likely growing at a faster pace than you realise. One important thing to bear in mind is that the contribution rates for employees and employers are the minimum amount. You can decide to increase your contributions and some employers may be a little bit more generous and offer a higher contribution rate as part of your salary and benefits package.
2. Create Goals For Your Retirement
Retirement could well be more than four decades away, so it may seem a little early for setting yourself goals. However, a target could help keep your retirement savings on course and provide you with direction when you’re making decisions.
Having an idea of when you would like to retire and the type of lifestyle you want can give you an indication of the type of figure you want to have in your pension when the time comes to accessing it.
Remember, the retirement goals you create now aren’t set in stone. Reviewing your plans, adapting and being flexible is crucial. As well as your personal circumstances, factors such as the State Pension age or regulation around when you can access pensions may have a significant impact on your plans.
3. Calculate Whether You’re Saving Enough Each Month
The good news is that the younger you start paying into your pension, the less you will have to contribute each month to meet your goals. By starting in your 20s, you’re already making a great start in securing the retirement you want.
Remember that the minimum contribution set levels for auto-enrolment are unlikely to provide enough to maintain your chosen lifestyle. So, making higher contributions or provisions, with your goals in mind, may be needed. You can pay either one-off payments or regular contributions to your pension.
When making extra contributions, it’s important to bear in mind your annual allowance and lifetime allowance. Exceeding these thresholds could mean that saving into a pension is no longer viable for tax efficiency.
4. Keep A Regular Eye On Your Pension
Once you have set up your regular contributions and have an understanding of how it’s invested, don’t just forget about your pension. Keeping an eye on performance and how it aligns up with your goals is just as important as the first steps.
Whilst you’re young, you’re more likely to swap jobs as you climb up the career ladder. This can mean you end up with various different pensions that you need to continue tracking. For some, it may be a good idea to consolidate them to make it easier. However, make sure to check the benefits, returns and fees of the various pensions before deciding.
Balancing Your Pension With Goals
One of the many difficulties when paying into your pension when you’re in your 20s is that you could have other, conflicting priorities. You may be focused on paying off debts accrued whilst studying or saving a deposit to buy your first home. As a result, paying in to a pension can fall down the pecking order.
Balancing goals is important in achieving your short, medium and long-term aspirations. By choosing short-term goals at the expense of your future could mean you fall short. Your financial plan needs to weigh up all of your goals, whether they’re almost upon you or many years away. It can be hard to know where your savings are best placed; this is an area where a financial adviser Leeds would be of great use.