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You’re young and carefree – or in your 30s and 40s with kids and a mortgage – so your pension is taking a back seat. We get it! But you should know that you’re missing out on tens of thousands of pounds of retirement income.
Regular small monthly contributions to your pension build up over time. Compound interest and investment returns do the hard work for you, helping your pension pot to grow. But how does this actually work – and what can you do right now to save more into your pension pot (without depriving yourself of life’s little luxuries)?
Let’s say you have a total of £50,000 to pay into your pension throughout your life. Compound interest and return on investments mean that £50k could mean a comfortable retirement nest egg… or one that may not see you through your retirement in full.
So, how can the same payments into an account have such a different outcome?
Drip-feeding your £50,000 in over the course of 30 years means each payment you make has the opportunity to grow over time. Paying in £50,000 when you’re only a decade away from retirement means that same investment won’t have the same opportunity for interest and returns. (Of course, the best thing to do would be to put the £50,000 in when you’re in your 20s so the whole lot has more than thirty years to grow – but we know how unrealistic that is for most people!).
The easiest way to show you how regular payments now grow faster than the same amount paid in later on is with some facts and figures.
if you paid in £100 a month from the age of 20, after annual growth of 4% and platform fees, your pension pot would be £137,266.91. But if you start paying in when you’re 30, that drops to £102,434.66. The difference in contributions – if you start when you’re 20 versus 30 – is £24,000 (£2,400 contributions a year). And yet, the difference in the final pot is 34,832 (this is the difference between paying £2,400 a year and the final pot difference figure of £34,832. I.e., the anticipated growth/return figure of £10k that’s not contributions). You’ve missed out on just over £10,000 of extra retirement money, just by delaying your contributions!
However, we’re realistic that you might find £100 a month feels too steep to pay in to a future fund you can’t touch for another forty-ish years when you’re in your 20s. That’s why we’ve come up with these suggestions to help you find the extra money (even £25 extra a month in your 20s is better than £0 extra!).
You’re at the start of your career, you’ve left home for the first time, and it’s your first regular pay cheque. Yet, the cost of living is high and you’re having to budget your cash in a way you never had to before!
The first thing to do is make a list of your monthly essential expenses: rent, utility bills, travel to work, food, phone, internet bills. Add a contingency, and some extra for your takeaways, nights out, and things like birthday presents for loved ones.
Not much left over? No fret! Make sure you’re following some classic money-saving tips to get into the habit of being savvy with your cash:
You could save hundreds of pounds each year by switching energy supplier. What many renters don’t realise is they have the right to switch, too (unless you’re a lodger with your landlord on the premises).
Shop around for cheaper electricity, gas, internet and phone bills. Comparison sites are a good starting point – but also check with suppliers direct as they may be able to match or better an offer you find on a comparison site.
Your water bill is set – but make sure the estimations are correct. Even better, if you live in a small household (such as a couple), look into getting a water meter. Again, your landlord doesn’t have to give you permission unless structural work is required to place the meter (not a common issue) – but for this, it is polite to let your landlord know you are switching.
A water meter could save you hundreds of pounds per year. Water bills use estimates on the size of your house and number of people – but a meter accurately measures what you use. In small households, this is beneficial; larger households won’t benefit (as the estimation system is usually in their favour).
Many of us shop online for the majority of our needs – and there’s no excuse to not be cash-savvy here! Plugin extensions such as Honey on your browser will help you to automatically find discount codes whenever you buy something online.
Another trick when you’re using a new online retailer is to register, fill your basket, but don’t check out. This often triggers an ‘abandoned card’ email, offering a discount code.
Try to always shop online through a cashback site, too. We like Topcashback and Quidco. Set them as your browser opening page so you never forget to find the retailer you’re looking for through the cashback site! These sites will give you small amounts of cashback for most purchases, and larger cashback for bigger things that are still essential spends like insurance or broadband.
Over the course of a year, you could save a few hundred pounds on purchases you were making anyway! Make a habit of shifting the cashback payments you receive into your pension for an easy way to top up contributions without spending any more cash.
We love apps that sweep your pennies into a savings pot! It makes it really easy to build a savings fund without really noticing.
Opt for either one within your banking app or an external app such as Chip. When you spend anywhere, the app will round up to the nearest pound and ‘sweep’ the pennies into a pot. So, if you spend £9.10 at the grocery shop, you’ll pay £10 with 90p swept into your pot.
This is a really low-energy way to save a lot of money over the course of the year – and you can pay those savings into your pension to boost returns with decades of investment on them!
We understand that it’s not always possible to live with your parents into your 20s. In fact, most of us don’t want to!
However, if you can find a way to reduce your living expenses in your 20s, it’ll give you additional cash for both a savings fund and your pension. If you can live at home with family members, even for just a year, you could save a lot of money overall and put some of that into your pension.
Moving into a house share rather than finding somewhere on your own (or with just your partner) is another way to reduce overall living expenses, as you’ll share utility bills and Council Tax.
It’s easy to see your pension contribution on your payslip and think that’s money you could have right now if only you opted out. Don’t!
Unless you’re really, really hard up, avoid opting out of your workplace pension. It is the best boost to your retirement you will ever get. That’s because due to Auto-Enrolment your employer has to also put in contributions for eligible employees AND the Government tops up with tax relief, too. In short: you get FREE MONEY from a workplace pension to help build your retirement pot!
Your priorities change as you enter your 30s. Maybe a wedding, family, or big career relocation is on the cards. These all take funds – but try not to take from your pension to save for them. To start with, that means not opting out of your workplace pension!
You can also:
As your salary increases, so does the amount of your pension contributions. That means your employer has to increase theirs, too. If your employer won’t give you a full pay rise, ask if you can negotiate how much they pay into your pension, instead.
For example, employers must pay a minimum of 3% of an eligible employee’s salary (and you must pay a minimum of 5%). Ask if they will match your pension contributions to 5% - or, ideally, increase your contributions by a percentage point or two and ask them to raise theirs. This is a tax-efficient way to boost your retirement pot and helps employers meet you in the middle when it comes to providing a pay rise.
Most first-time buyers are in their 30s these days. The good news is that a mortgage is (typically) lower than rent payments each month – although you do have other costs such as buildings insurance to consider.
However, a recent survey by Halifax bank revealed homeowners are £800 better off each year than renters on average. That’s the average: the area you’re in could be even more (in London, you could save £384 a month or £4608 a year if you own versus rent).
Of course, mortgages require big deposits. You’ll have worked out how much you can save each month to put aside your house deposit – and that gives you a great rule of thumb for future savings, too. Use the saving habit you created to build your deposit fund as your new pension saving fund! Shift over some of the extra cash you have each month once you own a home into your pension rather than savings fund – remember: future you will be grateful you did this.
With a decade of work experience behind you, you’re bound to have skills that you can use to set up a side business. Or, if you want to try a career leap into a different industry, now’s the time to start freelancing on the side before you make the leap to full-time self-employment!
You can earn up to £1000 a year through your side job before you have to register with HMRC as self-employed. It doesn’t matter whether you’re taking up seasonal gardening work at the weekends, using your craft passions to sell handmade items, or run a taxi service – anything over £1000 and you have to register. This just makes sure you’re paying the right taxes.
When you set up a side business, make sure you set aside at least 25% of your income for your tax bill. Over that, you can do what you want with it – including putting it into your pension! In fact, if you decide to turn your side job into something bigger, you can create a Limited company and take advantage of pension reliefs to boost your fund that way.
If you take time off for childcare or to care for a dependent, you’re entitled to receive National Insurance credits while you’re not working. This means you won’t lose out on your cumulative – and essential – 35 years NI contributions to receive a full State Pension.
Check, too, that you’re getting any state benefits you’re entitled to – as well as any grants if you’re facing financial hardship – by using the free Turn2Us calculator.
Unfortunately, our 30s and 40s are when we’re most likely to receive windfalls in the form of inheritance or redundancy packages. When you’re face with a large cash lump sum in your bank account that you hadn’t planned on receiving, it’s tempting to get spend-happy!
However, make sure you think about your future as well as your present. Consider putting away some of your windfall into your pension. You can pay in the equivalent of 100% of your annual salary up to £40,000 a year and still receive tax relief – anything over that won’t benefit from Government tax relief. Doing this will give you a significant boost for your retirement.
If you’re reading this and worrying that you don’t have enough saved for a retirement income – even you’re in your 50s or even 60s – don’t fret. There are plenty of things you can still do to make sure you have enough invested in your pension for a comfortable retirement, including tracking down and consolidating your old pensions with companies such as PensionBee.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. Capital at risk.