When you ask young people what they’re saving for holidays, property and cars usually top the list. These are all worthwhile things to be putting your hard-earned cash aside for, but pensions matter too and they’re the one notable omission.
You may well be thinking “why do pensions matter to me? I’m young, not thinking of retiring for ages and frankly have other priorities right now.” Don’t worry if you’re thinking this, you’re not alone! But here are five reasons that might just change your mind.
It’s important to note that this does not constitute personal advice and if you’re not sure whether an investment or savings account is right for you please seek professional financial advice.
Compound Interest
Described by Albert Einstein as the eighth wonder of the world, compound interest means that the first £1 you save into a pension will make you the most money. Having that £1 invested for 30 years, will grow a lot more each year, than if it was only invested for 10 years.
For example: If you invested £100, growing by four percent each year you would have £480.10 after 40 years. However, if you only invested the £100 for 10 years, you would have just £148.02.
Can afford to take more risk and therefore increase returns
Using similar principles to compound interest, the longer you are invested for, the less short-term market shocks will impact you. Your portfolio will be able to recover and even benefit from these falls, as when prices are low your pension provider can buy into the market more and conversely buy less when prices are high.
Those who invest for the long term can sustain a higher level of risk than those only looking to hold their money for five to 10 years. Of course, risk appetite is personal and depend on a range of other factors. You should never take on a level of risk you are not personally comfortable with.
Tax relief
Government tax reliefs essentially mean you get more money for your savings, which should never be ignored. You’re eligible for tax relief on private pension contributions worth up to 100 percent of your annual earnings.
Tax relief is paid at the highest rate of income tax you pay, meaning:
- Basic rate taxpayers get 20 percent pension tax relief
- Higher rate taxpayers can claim 40 percent pension tax relief
- Additional rate taxpayers can claim 45 percent pension tax relief
You will get this relief automatically if: workplace pension contributions come out of your pay before deducting Income Tax; or if you’re a basic rate taxpayer. In this case your pension provider will claim it as tax relief and add it to your pension pot, which is known as ‘relief at source’.
If you do not fall into these categories, you can claim the relief in your Self Assessment tax return.
Retirement is expensive
You may have seen your parents or grandparents travel the world in retirement, or perhaps take up new hobbies. Whatever it is you choose to do with your time when you stop working, the chances are it will cost money. Even just covering your day to day living expenses will soon mount up, particularly as you could be retired for over 25 years.
Think about the sort of lifestyle you’d like to maintain in retirement- how much do you need to afford it?
Pensions matter because you can’t rely on ‘gold plated’ final salary schemes or State Pension
Young people are very unlikely to be able to benefit from so called ‘gold-plated’ final salary schemes in the same way as previous generations have. The State Pension age seems to be continuously increasing, so who knows what it will be by the time we reach retirement, or if it will even still exist in its current format.
The responsibility has been firmly shifted onto individuals to make adequate provisions for themselves. Regardless of whether or not this is fair, it is surely a good idea to start planning for retirement if you are in a position to do so.
If this article has convinced you that pensions matter, find out how to take control and take the next steps.
Leave a Reply