4 ways to make the most of your pension in your 20s and 30s

When you’re young retirement can seem like a really long way off, and with recent headlines speculating that you might not be able to claim your State Pension until you’re 75, it probably is.

 

Yet while it’s easy to put it off and tell yourself that you’ll sort it out later, you could be missing out on free money in the meantime – whether it’s from your employer or HMRC.

 

Read on to find out the benefits of starting to save sooner rather than later and learn how to lay the groundwork for a comfortable retirement, now. 

 

1. Capitalise on the power of compound interest

Compound interest wasn’t named the eighth wonder of the world by Albert Einstein for nothing, so it seems only right that it tops this list of top pension tips. As any investment buff will tell you, the power of compound interest can have a significant impact on your savings over time and, better yet, you don’t need to be a maths whizz to make the most of it.

 

The term “compound interest” refers to the interest that you earn on interest. Therefore the earlier you start saving and earning interest, the more time compound interest will have to grow. Think of it like a snowball rolling along year after year, picking up more and more snow the longer you leave it rolling. You don’t necessarily need to keep saving forever, as the momentum you build up early on will keep it rolling, but, of course, the more you save on a regular basis, the faster your snowball will travel.

 

I can’t stress enough how crucial your 20s and 30s are for building that early interest. The sooner you start a pension and get into the habit of saving the better – what you do now can really take the pressure off you in later life. If you can spare it, try putting an extra £20 or £30 into your pension. Your older self will only thank you for it!

 

To find out if you’re on track it’s worth having a look at a pension calculator, which can help you figure out how much you’ll need to save for a comfortable retirement. The PensionBee calculator has sliders that enable you to change some of the details like your retirement age, current pension pot size, planned monthly contributions and employer contributions. It’s a great way of seeing how increasing your contributions can have a big impact on your pot size over time.

 

 

2. Make sure you’ve opted into a workplace pension

If you’re in your 20s and 30s today Auto-Enrolment is a bit of a life saver! Where before young workers would have scoffed at the idea of diverting a portion of their graduate salary towards a pension (exclaiming, “who can afford it??!”), much to their regret years later – now it’s a no-brainer. Mostly because you don’t even have to think about it.

The beauty of being auto-enrolled is the automatic part. As long as you’re over 22 years of age, work in the UK and earn more than £10,000 a year you’ll be eligible to be enrolled in your workplace pension scheme. As things stand your employer has to pay in 3% of your annual salary by law, and you have to pay in 5%, which includes 1% tax relief (more on this later!).

Although this is taken from your salary before it hits your bank account, so you can’t miss it, there will undoubtedly be some of you who perhaps legitimately don’t think you can spare the 5% required. I’d urge you to spare a thought for all of the self-employed people out there who don’t qualify for Auto-Enrolment and imagine what they’d say to you about throwing “free money” away. In fact, what will you say to yourself in 20, 30 or 40 years’ time if you don’t take advantage?!

 

3. Move your pensions when you change jobs

Gone are the days of a job for life! So much so that the Department for Work and Pensions recently estimated that the average person could have 11 pension pots from 11 employers during their lifetime. Gaining new experiences and discovering your passions is a truly great thing, but it can become a nightmare when it comes to managing multiple pensions from previous jobs.

That’s because over time it can be easy to forget where your money’s saved, plus poor performance and hidden fees can take their toll on dormant pots (which are no longer being paid into), in some instances completely wiping out their value.

 

To avoid losing track, there are companies like PensionBee who can help you transfer your old pensions into a new online plan, that you can easily manage from your smartphone. You'll be able to check your balance, make contributions and manage your pension, all from the palm of your hand. Pretty cool!

 

4. Don’t forget about tax relief

 

To encourage you to save into a pension, the government provides tax relief on your contributions. Most basic rate UK taxpayers will qualify for a 25% tax top up from HMRC. That means for every £100 you pay into your pension, you’ll get another £25. So that’s more “free money”!

 

The especially good thing about tax relief is that almost anyone can benefit from it – whether self-employed, in part-time employment or not working at all. Plus, if you’re fortunate to be earning enough to pay a higher rate of tax (40% for salaries over £50,000 and 45% for salaries over £150,000 in 2019/20), you can claim additional tax relief through your Self-Assessment tax return.

 

These are just four ways you can boost your pension and really make the most of the spare money you have in your 20s and 30s. To find out more useful information and tips, or to consolidate your pension pots, visit pensionbee.com.

 

With investment, your capital is at risk. Pensions can go down in value as well as up, so you could get back less than you invest.

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