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Why you should care about your pension in your 20s

Young people have many financial priorities. Whether it’s buying a house, going on holiday, or simply making some extra cash so they can fund their lifestyle, there’s a lot to focus on. One thing that rarely makes the top of the list is a pension. Here’s why you should care about your pension.

This is hardly surprising. Why worry about something you won’t need for 40 years or so? The problem is you need to prepare now so it is there when you need it. You really do need to care about your pension in your 20s.

As it’s pensions awareness week, I thought it an appropriate time to draw attention to this important issue.

This post will cover:

  1. Being prepared
  2. Compound interest
  3. Taxes
  4. Financial independence

Being prepared

The best thing about sorting your pension in your 20s is that you can be prepared. You may not be able to save much at this stage. As previously mentioned, most of us have a lot of other financial priorities. But you should still care about your pension.

That’s alright! You don’t need to be putting 50% of your salary into a pension or even close to that sum. The important thing is to start somewhere.

Your workplace pension is a great way of doing this. Not only do you put money in each month, but so does your employer and you get a government bonus too. It’s practically free money!

For example, I’ve been paying into my workplace pension for just over 3 years now. My pot is nearly at £5,000. This isn’t a huge sum, but it’s a good start.

I haven’t contributed quite half that amount, though. My employer has put in nearly £1,500 and I’ve had around £600 of government tax relief. The rest comes from the pension fund increasing in value.

This demonstrates how putting in small sums can make a big difference. It has also helped me be more aware of my pension and to start thinking about how much I will need to save to fund my retirement.

The answer is a lot more than I’m currently saving, but at least I’m on the right track!

You can use this pensions calculator to work out how much you need in retirement and how much you’ll currently have. Then you can start planning how you’ll achieve your goals.

Compound interest

Albert Einstein described compound interest as the eighth wonder of the world.

Compound interest essentially 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.

Therefore, the earlier you get started with your pension, the larger your pot will be when it comes to drawing on it.

Even if it’s just your workplace pension – which you should have via automatic enrolment unless you’ve opted out – saving into a pension in your 20s will help you reap rewards later in life.

Taxes

Tax hikes have been in the headlines recently. We’re all going to be paying more tax – whether we like it or not.

Pensions have certain tax benefits.

If your pension contributions are coming out of your salary before tax, they won’t be counted as part of your taxable salary so you won’t pay any tax on them.

Effectively, you get tax relief at your highest marginal rate of income tax.

If your pension contributions are paid out of your after-tax salary, your pension scheme will add basic-rate tax relief whenever you make a contribution. If you pay higher or additional-rate income tax, you can reclaim the extra tax relief through your annual self-assessment tax return.

This means a £100 pension contribution will effectively cost you £80 if you pay basic-rate income tax, £60 if you pay higher-rate tax and £55 if you pay the top rate of income tax.

Non-taxpayer you can still get basic-rate tax relief on contributions up to £2,880 (£3,600 including tax relief).

I’m not qualified to give specific tax advice. Speak to a fully qualified adviser if you are thinking of making changes to your finances or if you need advice or support.

Financial independence

The FIRE – Financial Independence Retire Early – movement is growing in popularity. More and more people are looking to escape the working world and have the freedom to live how they want.

If you want to retire early, obviously your retirement fund is going to need to last you longer.

You can’t normally take your pension until your 55. You also won’t get the state pension until your at least 67 if you’re in your 20s or early 30s now.

This means you may need to look at ways of saving outside of a pension if you plan on retiring before 55. It’s entirely possible to do this, but once again preparation is key.

If you do want to retire early, you also have less time to benefit from compound interest. Although, it’s worth noting you don’t need to take all your pension at once. You can live off a certain part of it, while the remainder stays invested and (hopefully) keeps growing.

However, if you want to retire by 40, for example, getting prepared in your 20s will really help. This means you could still have 15-20 years to invest and grow your retirement fund to a suitable size to live off.

If you enjoyed this post, please like and share it across social media or with your friends! I’d also love to hear your thoughts and experiences. Do you think you should care about your pension in your 20s? Are you pursuing financial independence and hoping to retire early? Please do share them below.

Don’t forget to follow me on social media @Katie20Percent to keep up to date with all my latest posts.

By The Twenty Percent

Hi I'm Katie and I use my blog to help young people take control of their personal finances.

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