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4 important reasons why young people shouldn’t neglect their pension contributions
The coronavirus pandemic affected the finances of many Brits. Many people struggled to make ends meet due to reduced income and, as such, this caused some of them to alter their habits.
According to a study, published by FTAdviser, many young people are delaying their pension contributions to maximise their take-home pay. While this may be understandable, it can have significant long-term consequences.
Since millennials are less likely than their parents to enjoy a comfortable retirement, it’s important that they start contributing sooner rather than later if they want to live their desired lifestyle. Here are four important reasons why young people shouldn’t neglect their pension contributions.
1. Having a sustainable income in retirement can give you more peace of mind
One of the main benefits of retirement is that it offers you the chance to do the things you’ve always wanted. You could travel and see the world, master your hobbies, or simply spend more time with your friends and loved ones.
According to research by Which?, the average comfortably retired couple spends around £26,000 each year. This is a significant sum, especially if you plan to retire before the State Pension Age.
Of course, when you’re enjoying your retirement, you probably won’t want to have to worry about running out of money. Knowing that you have enough wealth to support your desired lifestyle in a sustainable way can give you greater peace of mind.
2. You can take advantage of employer contributions
Another important reason not to neglect your contributions is the impact of your employer’s contributions to your workplace pension.
Since 2012, most workers are automatically enrolled into a workplace pension scheme. This was a move by the UK government to help people save for retirement without having to go through the hassle of setting up a pension themselves.
Instead of having to manually transfer money yourself, auto-enrolment means that your employer simply deducts some of your wages and adds it to your pension pot. The minimum contribution that they have to make is 8% of your salary, of which at least 3% is paid by your employer.
This is important as it can be a valuable way of growing your pension. Essentially, what this means is that when you make a contribution from your salary, it’s being topped up with free money from your employer.
You should also bear in mind that 8% is only the minimum contribution and you can increase the amount you put aside if you want. Some companies also offer to increase their own contributions when you do too, up to a point.
This can be a useful way of growing your pension wealth, as any contributions are effectively doubled. However, not all employers offer this benefit, so it’s important to check beforehand.
3. You can benefit from tax relief on your contributions
The third important reason is that you can benefit from tax relief from the government when you make contributions. This can be a valuable way of boosting your wealth.
To encourage more people to put money aside for retirement, whenever you make a contribution to your pension, the government tops it up with a little extra. The amount that you can receive is dependent on the amount of income tax that you pay:
- If you are a basic-rate taxpayer, you will receive 20% tax relief
- If you are a higher-rate taxpayer, you will receive 40% tax relief
- If you are an additional-rate taxpayer, you’ll receive 45% tax relief.
For example, if you pay the basic rate of tax, it will only cost you £80 to make a £100 pension contribution, as the government will add an extra £20 in tax relief.
4. Starting young can give you longer to benefit from compound growth
The final reason why it’s important not to neglect your pension contributions while you’re young is that you have more time to take advantage of compound growth.
Essentially, this is when you receive returns on previous growth. While it often starts small, in the long term it can add up to significant amounts. Young people are especially able to benefit from this phenomenon since they have a longer time frame for the wealth to grow.
According to research published in the FTAdviser, a young person in their 20s could miss out on as much as £21,000 in lost growth if they put off pension contributions for the first five years of their career.
This is why contributing to your pension while you’re young can be so valuable. Not only can you effectively get free money from tax relief and your employer’s contributions, but you’re earning compound growth on it too.
Get in touch
If you want to know more about how to grow your pension wealth for a comfortable and sustainable retirement, we can help. Please email us at advise-me@fosterdenovo.com or call us on 0330 332 7866 to speak to one of our team.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority.
Sources: https://www.ftadviser.com/ftadviser-focus/2021/08/12/why-it-is-important-to-start-pensions-early/
https://www.ftadviser.com/ftadviser-focus/2021/08/12/why-it-is-important-to-start-pensions-early/
