Five reasons you why pensions matter

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.

15 responses to “Five reasons you why pensions matter”

  1. […] One of my favourite tips to save money as things open up is to increase your pension contributions. […]

  2. […] Pensions were the most popular topic when I asked what people’s worst financial decisions were. […]

  3. […] Pensions are also key to your future. Start with paying into your workplace pension scheme and up the contributions if you feel able to.  This simple step could drastically improve your retirement and financial future. […]

  4. […] Even with some relaxations in the government’s guidelines, you could make the most of a quieter summer by using the extra time to check in with the parts of your finances you tend to ignore. Pensions are some of the most ignored assets, perhaps because we don’t immediately benefit from them, but they are so important for everyone in retirement. […]

  5. […] When you do find a new job, don’t forget to transfer your workplace pension to avoid losing out on the contributions you have already made. You can find out more about why this is important here. […]

  6. […] Pensions are another asset we often forget about. These can be confusing, so I explain more about pensions in this post. […]

  7. […] Personally, I found this the easiest change to make. The vast majority of full-time employees in the UK qualify for auto-enrolment into a workplace pension scheme. If you’re not sure what this is, you can read more about pensions and your entitlements here. […]

  8. […] Even with some relaxations in the government’s guidelines, you could make the most of a quieter summer by using the extra time to check in with the parts of your finances you tend to ignore. Pensions are some of the most ignored assets, perhaps because we don’t immediately benefit from them, but they are so important for everyone in retirement. […]

  9. I’ve actually been doing some admin on my pension since I’ve been on furlough. It’s so important!

    1. The Twenty Percent – United Kingdom – Hi I'm Katie and I use my blog to help young people take control of their personal finances.

      I’ve been doing the same- such an important thing that often gets neglected when we’re busy!

  10. […] That said, investments are not designed to be held for short periods of time and you shouldn’t necessarily rush to withdraw your money as soon as you see a slight downturn – financial markets are notoriously volatile and it’s likely your investments will recover and exceed their previous value in time. Remember: Compound interest is your friend. […]

  11. […] That said, investments are not designed to be held for short periods of time and you shouldn’t necessarily rush to withdraw your money as soon as you see a slight downturn – financial markets are notoriously volatile and it’s likely your investments will recover and exceed their previous value in time. Remember: Compound interest is your friend. […]

  12. The All Round Investor – The All Round Investor is a blogger who aims to teach fiscal responsibility through savings and investments over a long time period. While (sadly) not a rich-quick scheme, by encouraging lifelong financially literate decision making, it is possible to boost your budget and live a retirement worthy of legend. Check out more at www.theallroundinvestor.co.uk

    I really enjoyed this article. So many young people don’t think about their retirements and so don’t understand the life changing benefits which compound interest can give! Really informative and thoroughly enjoyable

    1. The Twenty Percent – United Kingdom – Hi I'm Katie and I use my blog to help young people take control of their personal finances.

      Thank you so much, I’m really glad you enjoyed the article!

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