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Your pension: the importance of saving early

Your pension: the importance of saving early

Category: Pensions

Updated: 04/11/2014
First Published: 04/11/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The importance of saving towards a pension is almost continually drummed into us, and happily, it seems as though the message is starting to get through. Official Government figures reveal that workplace pension saving is on the rise, largely thanks to auto-enrolment, with an extra 4.7 million private sector workers now saving for their future.

But, there's one key message that bears repeating – if you want to maximise your chances of building a decent pot that can ensure a comfortable retirement, you want to start saving as early as possible.

The first pounds you save will work the hardest for your future

The sooner you start saving for a pension, the more years you'll have to save and the bigger the resulting pot will be. But, there's more to it than that – thanks to compound interest you'll benefit even more, and in the long-run, saving small amounts from a young age will leave you with a far bigger pot than if you started saving bigger amounts later on in your career.

Retirement and wealth advice specialists Towry have done the calculations to highlight this fact, and the results are pretty cut and dry.

According to their figures, if a 30-year-old saved 5% of their £40,000 annual income for the remaining 35 years that they're in work, they'd have a pension fund of £153,196.63 when they retired at 65 (assuming a modest annual fund growth rate of 4%). This is without the employee increasing his contributions as his salary rises, and is based on the £2,000 he pays in from the first year – in reality, the monetary amount saved (and therefore the total pension pot) could well increase as the years go on.

This is in sharp contrast to the potential pension pot of someone who didn't start saving until they were older. Should an employee put off pension saving until they were 50 – perhaps because they focused on other financial priorities, such as buying a home and paying off a mortgage – they'd need to play catch-up on their retirement savings, but even if they put 15% of their £40,000 annual income into a pension for the next 15 years, they'd still only have £124,947.19 at age 65 (again assuming modest returns of 4% per year).

So, despite this larger contribution, the employee who started saving small amounts earlier would end up with a bigger pot. A lot of this is down to the power of compound interest – you're earning interest on your savings, and then interest on that interest – and even modest savings from an early age will increase your pension far more than late cash injections.

Little and often

Of course, the younger generation may find the notion of saving for a pension – when retirement is so far in the future – a difficult idea to swallow. Many will be concentrating on finding enough money to get on the property ladder or clear student debts, and sky-high rental costs mean it could be difficult to contemplate the idea of stashing away money for a life stage that's so far away. But, that's why it's so important to take a longer-term view of things, as there'd be nothing worse than getting to retirement only to regret not saving more.

Andy James, head of retirement planning at Towry, commented: "Whilst hard-pressed individuals will rightly have a priority of paying down expensive debt, it will be important not to miss out on any contributions that their employer will make on their behalf if they agree to make payments themselves.

"It goes without saying that the more you save over your working lifetime, the better… but remember [that] the first pounds you save are the ones that will work hardest for you. Even if you cannot contribute as much as you might like, the power of compounding shows that it is vital to put something into your retirement fund as early in your career as possible."

Saving little and often really is key, as even small contributions made over a long period of time can make a big difference to your pension fund.

Make the most of auto-enrolment

So, isn't it time you got in on the pension saving action? Auto-enrolment should make the process easier. The Government initiative has had a big difference on the mentality of younger savers, and many more are now saving into a fund for later life. If you want to maximise your chances of having a decent pot when you hit retirement, it's time you got on board and really made the most of it.

The initiative has now been rolled out to all firms with at least 60 employees, and by 2018, even the smallest employers will be obliged to have a suitable workplace pension scheme in place. All you need to do is make your contributions! Try to resist the temptation to opt out and instead view it as another regular monthly outgoing, and if you can, you may want to consider increasing your contribution level from the current minimum.

Remember that your employer also makes contributions to your pot, so if you don't enrol in your workplace scheme, you're effectively missing out on extra money from them! That extra cash can be put to great use in later life, so you don't want to overlook it. It's all about being prepared for the future, and the earlier you save, the more you'll have to enjoy in your golden years.

What next?

Find out more about auto-enrolment in our guide

Are you approaching retirement? Then consider your income options using our annuity planner

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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