The time has come and you have finally graduated, starting on that career ladder in a world very different from that of your parents. In your 20’s and 30’s contributing to your pension is unlikely to be a top priority. If you’re juggling career demands and possibly a family life, you may have little time left over for your personal finances, but it is so important that the time is taken to consider a financial plan.
You are the first generation to be worse off than your parents and when it comes to pensions. Unfortunately, paying the minimum towards your pension is unlikely to give you the life you desire. Rising longevity is a big challenge facing our society, but one that can be managed with foresight and planning.
The German Chancellor, Otto von Bismarck, introduced the world’s first state pension in the 1880s. You had to be 70 years old – and the expectation was that you would only live a few years after that to collect it.
Bismarck designed the system in a very different world. Today, many of us can expect to live well beyond 70. A recent study by UBS found that around a third of wealthy individuals in the UK are confident about living to 100 so we need to prepare for that financially 1. The good news is there are simple things you can do today that lead to better outcomes tomorrow.
- Set some savings goals
Think about what you want your retirement to look like. Once you are clear on how and when you want to retire, work backwards to calculate how much to save. Think about how much you want to put away by the time you reach certain ages.
- Write it down
Once you have a rough idea of what it takes to achieve your goals, commit it to paper. Put it in a visible place to remind yourself daily.
- It’s okay to start small
Investing even very small amounts early on in your career can reap big rewards. This is because your money will have more years to benefit from that magic ingredient: compounding. As Albert Einstein said, “The most powerful force in the universe is compound interest”. The sooner we start saving into our pension, the more choices we will have.
- Check how much your employer is contributing
When you pay into a workplace pension, your employer also contributes. The amount paid depends on your pension scheme and your earnings. To find this out, check with your employer.
- Take financial advice
Becoming your own investment adviser and money manager is not easy. A financial adviser can assist you in creating a financial plan and mapping out your goals.
There is one huge benefit that shouldn’t be underestimated when it comes to pensions, the incentive for providing for your own future and not relying on the State… tax relief.
When paying into your pension, you receive tax relief on any contributions that you make. This is at the highest rate of income tax that you pay, provided that the total gross pension contributions paid into your pension scheme, by you, your employer and anyone else don’t exceed the lower of your annual earnings and the annual allowance of £40,000 (tax year 2020/21). Some say money for nothing!
The key is to start early and have a plan, review that plan as time goes on and make sure you increase what you pay into your pension as you receive pay rises along the way. The future can be so bright if you start now.
Pensions can seem complex (because they can be) so seek advice from a Financial Adviser if in doubt.
By Angeline MacLaren, Navigation Wealth Management