Starting your pension – why sooner is better
Find out when to start saving for a pension and how small changes can make a big difference to your future.
When to start saving for a pension
Starting a pension is one of the most important financial decisions you make. The sooner you start, the better.
The longer you save into your pension, the more time it has to grow – potentially giving you more money in retirement. Think of the first £1 you save in your pension: it’s the hardest working £1 you’ll save, because it has the longest time to grow. The later you start saving, the more you’ll need to invest to get the same outcome. But whatever age you are, it’s never too late to start saving.
Understanding auto-enrolment
Your employer must automatically enrol you in their workplace pension scheme if you’re:
- an employee working in the UK
- aged between 22 and State Pension age
- earning over £10,000 per year.
Auto-enrolment was introduced by the government to help more people save for retirement. Both you and your employer contribute to your pension, with a minimum combined contribution of 8%.
Here’s how it breaks down:
- 5% comes from your wages, including 1% in tax relief.
- 3% is contributed by your employer.
If you earn less than £10,000 a year but more than £6,240, you can ask to join your employer’s workplace pension scheme, and they must contribute.
A workplace pension scheme is an easy and effective way to grow your retirement savings. Not only does your employer pay into your pension, but the government does too.
Saving for your pension at different life stages
No matter your age, it’s never too early to start planning for retirement. Here are some things to consider at each stage to help you reach your financial goals.
Starting your pension in your 20s means even small monthly payments can grow into a much larger amount later on.
For example, paying £50 a month from age 22 could grow to £100,000–£150,000 over time, depending on returns. If you’ve had several jobs, you might have multiple pensions. Combining them can make it easier to manage your money.
Find out more about combining your pensions.
In your 30s, you’re likely to have more responsibilities making demands on your money, like a mortgage or childcare. With these more immediate, day-to-day expenses, it might be tempting to reduce or even pause your pension contributions.
But if you can protect your pension savings during your 30s, you’ll reap the benefits of these early contributions in retirement.
Remember, if you’re paying into a workplace pension, you’re effectively getting extra money each month on top of your salary – in the form of employer contributions and tax relief.
Your 40s are a great time to review your finances and plan for the retirement you want.
If you have extra money at the end of the month – perhaps after a pay rise or bonus – you could consider increasing your regular pension contributions to boost your pension. You can save up to the maximum amount eligible for tax relief each year — this is either 100% of your earnings or £60,000, whichever is lower. This limit is known as your annual allowance. Find out more about LINKpension tax relief.
By this stage in life, you may have worked for over 20 years. This could mean you have lots of different pensions. Transferring all your old pensions into one place can make future planning simpler and could help you save money on fees – leaving more money in your pension savings.
As your retirement age gets closer, this is a good time to increase your pension contributions, if you can. Some of your financial commitments and monthly outgoings may ease, while your earnings could be at their peak. Even if your savings are modest, with the State Pension age currently at 67, there’s still time to save for your retirement. Every small amount helps.
If you receive a work bonus or an inheritance, or have any other savings, consider making additional pension contributions to take advantage of the tax relief benefits (within your annual tax-free allowance) and any matching employer contributions.
Many people don’t know they can also make contributions to someone else’s pension. Known as a third-party contribution, this is a useful way for couples to boost their retirement savings if one partner has taken a career break, perhaps to raise children.
How much should you pay into your pension?
How much you should pay into your pension depends on your lifestyle goals, income, and family circumstances, including:
- Whether you’re single or in a couple
- Whether you own your home outright or will still be paying a mortgage or rent
- Whether you have any financially dependent children or grandchildren
- Your State Pension entitlement
- Your health.
For most people, saving between 10% and 15% of your salary into your pension over your working life is likely to provide a decent income in retirement. You can adjust your contributions over time, as long as they don’t fall below the minimum auto-enrolment levels.
When you can, topping up your pension can make a big difference, as the minimum auto-enrolment contributions alone are unlikely to provide a comfortable retirement.
Use our retirement planner to estimate how much you’ll need and check your progress toward the lifestyle you want.
The impact of topping up pension contributions
Making additional contributions to your workplace pension is one of the most efficient ways to boost your retirement savings, thanks to the extra ‘free’ money from your employer and tax relief. The more you pay in, the larger your pension could be in later life.
For example, let’s say you earn £30,000 a year:
- You contribute 5%, which is £1,500 a year. This includes 1% (£300) in tax relief from the government.
- Your employer contributes 3%, which is £900 a year.
- Your total annual pension contribution is £2,400 (8%).
If this amount is paid in every year and your pension grows by 5% a year over 30 years, it could be worth around £153,900. When you add in wage inflation of 3% over the period this becomes around £221,700.
However, if you choose to contribute 9% of the same annual salary (£2,700, including tax relief), and your employer continues to contribute 3%, your total annual contribution would be £3,600.
Assuming the same 5% annual return over 30 years, your pension could grow to be worth around £173,400. And when you add in wage inflation of 3%, it is around £249,700.
Read more about how pension contributions work.
