Getting Started Early: The Benefits of Young People Saving into a Pension
Photo: William Brown
Saving into a pension tends not to be a main priority for young people. With retirement a long way off, retirement planning seems unimportant compared to many other financial priorities, such as saving for a deposit on a property. Busy social lives and the opportunity to spend money on holidays or travelling often take priority whilst other financial commitments such as starting a family seem far off. This does not diminish the importance of contributing to a pension from an early age. It is essential that young people recognise the importance of pension contributions early in their careers in order to live comfortably in retirement. Below are five reasons why young people will benefit from saving into a pension:
- Tax relief - Pension contributions are eligible for relief from income tax and, if you agree to a salary sacrifice arrangement with your employer (where you agree to a lower salary and your employer then pays the difference into your pension) you will also receive relief on the national insurance. Even though you are giving up some of your wage to gain this tax relief, over the long term you will retain more of your salary for your personal benefit, as opposed to losing it to the government in tax you would otherwise pay.
- Employer contributions - With the onset of auto-enrolment, employers are now obligated to contribute to company pension schemes and will also contribute to your pension on your behalf; their payments are claimed as an allowable business expense, meaning they are also paid gross. The charges associated with company pensions are also usually lower than an individual pension, providing further incentive to join. Again, although you have sacrificed some of your salary, you are receiving additional funds from your employer you wouldn’t otherwise receive.
- Beneficial to start early - With defined benefit or final salary pension schemes increasingly becoming consigned to the past, defined contribution schemes (where a pension pot is built up using yours and your employer’s contributions (if applicable) plus investment returns and tax relief) are the main option for pension saving. Defined contribution schemes tend to be less generous than final salary schemes, and as such, considerable sums are needed to enjoy a comfortable retirement. The later one starts saving, the greater the task of saving for a comfortable retirement becomes, meaning you may have to sacrifice more of your salary at a later stage.
- Future of the state pension - An ageing population in the UK means there is increasing strain on the state pension fund, which is paid for by our national insurance contributions. Some forecasters believe the fund will have run out long before those aged between 18 and 33 reach state pension age. With the future of the state pension being far from certain, young people may be unable to rely on the state to provide them with any income in retirement, heightening the importance of saving into a private pension.
- Shorten working career - the earlier you start saving, the larger your accrued fund will be and the more flexibility you will have about when you can retire. With the state pension age increasing, and looking set to continue to do so, you may not be eligible for state benefits when you would ideally like to retire. The bigger your fund, the younger you may be able to stop working and enjoy a longer retirement from an earlier age. Your options for your pension fund will also be greater; for example the larger your fund, the larger your tax-free cash lump sum (usually 25%) will be and the possibilities of how to use it will be wider.
As someone in my 20s, I would strongly recommend that young people consider carefully their retirement planning from an early stage, as it could make a significant difference when you decide to retire.