Many young people delay thinking seriously about retirement until they're older, but this can have a hugely negative influence on your financial position when you reach retirement age. Here, we discuss the benefits of starting your pension saving early.
It may seem incredibly obvious, but when it comes to building a pension and saving for retirement, the earlier you do it, the better. It is obvious, however, for a very important reason - the more you save now, the more you will have at your disposal later. That said, many young people, especially those aged 25 to 40, do not give much thought to saving for retirement or do not believe they are in a position to do so; yet putting money away for the future has never been easier (or more important).
Many people have high expectations regarding their financial position in the future, and if you're aiming for a very comfortable retirement, then effective pension planning is imperative. What's more, early pension saving has never been more important; the retirement age continues to climb, which means you need to save more now to make sure you can retire when you want to (and not when you're told to), and life expectancy is rising, meaning you will have a longer post-work life and will therefore need more money to maintain your retirement lifestyle.
Relying on a state pension is unlikely to be enough, especially if you are working towards strict financial objectives, and while automatic enrolment may provide a helping hand or enable you to get started, there are other decisions to be made that can help you better meet your goals. This is where expert wealth management advice can prove invaluable.
Automatic enrolment is the name given to the requirement, as set out under the Pensions Act 2008, that every employer in the UK must put certain staff into a pension scheme and contribute towards it. It offers a very convenient way for employees to enter such a scheme. The initiative, which will apply to employers of all sizes by 2018, is designed to ensure workers are saving for their retirement sooner rather than later.
Those who will be automatically enrolled - and will have to opt out of the scheme if they do not wish to be a part of it - must be at least 22 years old and below state pension age, earn more than £10,000 a year, work in the UK and not already be in a suitable workplace pension scheme. Among the main benefits of the initiative are that your employer will match your contribution and, because payments qualify for tax relief, can represent a form of tax-free pay rise.
While automatic enrolment can act as a good starting point, it is important to have a clear idea of how it all works and how much you are contributing. You have the option to either increase or decrease the amount you pay in, which is something that should be seriously considered if you have a long-term plan for your pension and objectives you wish to meet.
Setting up a personal plan
A personal pension plan represents a different pension saving opportunity, which can be particularly appealing if you have more ambitious plans for your pension pot or wish to have more control over how and what you save.
Setting up a personal plan can be trickier than simply joining your workplace pension scheme, however, it is recommended that you seek the help of an expert financial adviser or wealth management company to make sure you choose a plan that is right for you and will help you meet your goals.
There are various types of plan from which you can choose, including:
Standard personal pensions - These are usually chosen to match your attitudes to risk and your specific needs, and usually involve regular monthly payments into your plan
SIPPs - Self-invested personal pensions provide greater control over investment of your pension savings and are often used when larger contributions are made
Stakeholder pensions -These include a default investment strategy, low minimum contributions and charges are often limited
If you do opt for a personal plan, you will need to decide how to invest your pension savings, which will involve choosing from a range of funds, each with their own investment profile. Your choice will likely be dependent on your attitude to risk and whether the potential growth matches up with your objectives. It is therefore imperative that you have the right guidance when making such an important decision.
Setting goals and starting early
Not only should young people start their pension saving early, they should do it with certain goals in mind. These do not have to be clearly defined at this early stage, but it is important to have some ballpark figures of where you need to be with your contributions to meet general objectives - such as retiring at a certain age or living a certain type of lifestyle once you are in retirement.
Remember, if you put less away now, you will need to pay more in the years leading up to your retirement. By planning early, you can make sure that your pension saving - in whatever form it takes - is setting you on the right path to the retirement you are dreaming of.