Pensions: where every little helps (a lot)

There is an assumption that unless you’re going big and starting early, saving is a waste of time. That couldn’t be more wrong. Here are three reasons why even modest saving and small tweaks can make a huge difference.

For young people, private pensions advice is really very simple. Start early, save about 20% of your salary and don’t retire until you’re 67. That’s a pretty sure-fire way of securing a comfortable income in retirement.

Most people don’t do that. When you’re young, going on holiday, new cars, or saving for a deposit on a home tend to be higher priorities. We often also hear about the challenges cash-strapped workers are facing. Is it any wonder that pensions don’t get much attention?

True, many people now get a pension from their employer due to auto-enrolment and some may have had pensions included as part of a benefits package, so it’s possible to have two or three pension funds by the time you reach your thirties and forties. But these can be small and difficult to manage, and that puts people off detailed planning.

But it really is true: every little helps. There are a number of compelling reasons to get smart with your pension planning, regardless of how old you are or how much you can afford to put aside.

1. Free money — seriously

Any cash you save into a pension is automatically topped up by the government in the form of tax relief. For basic-rate (20%) taxpayers, that means £20 for every £80 that goes into a pension. It’s literally free money. Actually it’s your own money you’re getting back from the taxman. If you save into a pension scheme run by your company, you will also get some sort of contribution from your employer. If you don’t contribute to a pension, you’ll be missing out on both these potential sources of free cash.

2. Compound interest is a wonder

Depending on your policy, the earliest you can access your pension fund savings is when you turn 55 years old. Downside? You can’t spend it now. Upside? Because you can’t spend it now, it has time to benefit from compound interest.

Albert Einstein once said “Compound interest is the eighth wonder of the world” because it turns small amounts on money into lots of money… if you give it time. “Compounding” means that each year you don’t just make a return on the money you save — you also make a return on all the returns you’ve made in previous years. Some pension funds have better interest rates than others, so it’s worth checking the performance of your pension now to make the most of future growth. The magic of compounded interest means saving a small amount for a longer period normally beats saving larger amounts over a shorter period. And that means more money for you and a better lifestyle for your family.

3. You can’t rely on the state pension

Many people plan to live on the state pension when they retire. At the moment, the maximum you can get is £159.55 a week. If you’ve paid off your mortgage, you may just about be able to survive.

Actually, Which? magazine estimates that the average pensioner spends about £13,000 a year – £4,800 more than the state pension pays.*

It gets worse. There are also no guarantees that the state pension will continue at this level forever. Increasing life expectancy means the government’s pensions bill has soared in recent years. Ministers have already reacted by raising the age at which people qualify for the state pension.

That means every little bit you can do to top up your state pension will make a big difference later – even if it’s just making sure your old workplace pensions are being run efficiently and invested in decent funds.

The pensions industry and the government have been making all these changes mainly because we’re all living longer. It means you’re probably going to spend much more of your life in retirement.

So it pays to get your pensions in order. Every little decision – paying in a little more, getting old pensions sorted out, making sure you’re getting a good deal – can make a big difference for a big part of your life.

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