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When should I start saving into a pension?

Question: I've just started my first job out of university. When should I start saving into a pension?
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When should I start saving into a pension?
When should I start saving into a pension?

Most people should start saving into a pension as early as possible. If you start making small, regular pension contributions as soon as you start work you will have many years to grow a decent sized retirement fund.

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The sooner you start saving for your retirement, the longer your money has to grow, and the bigger your pension pot should be.

While it may seem a long way off to start saving for a pension when you're in your 20s or 30s, you can start with small contributions and increase them when you get a pay rise.

In fact, grandparents can even open a pension for their grandchildren. They can put in £2,880 and the government will add 20% of tax relief. By the time the child becomes a taxpayer in their own right they will have a good-sized pension pot they can add to.

Why is it a good idea to start saving in a pension?

If you pay each month into a pension fund when you're in your 20s, the invested money has your entire working life to grow, which is much longer than than if you start making the same contribution 20 or 30 years later.

You also get tax benefits. A pension is a long-term savings plan but with tax relief. Some of your money that would have been deducted from your pay and gone to HMRC as tax goes into your pension instead.

However, if you're in your 40s or 50s and you haven’t yet started a pension, there's still time to start and make the most of the tax benefits that a pension brings. You can claim unused annual allowance for the past three years if you missed out on saving the full amount into a pension.

The sooner you start putting money in, the bigger your pot will be, plus the tax relief on your pension contributions can give your savings a big boost. It's never too late to gain valuable tax relief and boost your retirement savings.

How does pension tax relief work?

When you save into a pension the government gives you an incentive in the form of tax relief. This means that the money you would have paid in tax is not deducted but instead goes into your pension fund. 

Everyone can get tax relief on their pension contributions, up to a certain level that is based on your earnings and an annual allowance.

  • You can pay 100% of your annual earnings into your pension and get tax relief, although in practice not many people would be able to make a pension contribution that is equivalent to their total salary.

  • The government gives everyone an annual allowance, which is the maximum you can save into your pension each tax year. The tax year runs from 6 April in one year to the 5 April the following year. In the 2022 to 2023 tax year, the annual allowance is £40,000.

For PAYE employees your pension contributions will be deducted from your monthly salary before tax is deducted. Others may pay contributions from taxed income and the government tops up the payment with the tax you already paid (as a basic rate taxpayer, when you pay in £4 the government pays in an extra £1).

Will my employer help with my pension?

If you're employed, your employer must offer you access to a pension scheme. For most workers, your employer must also pay into your pension (they do not have to contribute for very low paid staff).

In most automatic enrolment schemes, you’ll make contributions based on your total earnings between £6,240 and £50,270 a year before tax. The minimum total contribution has to be 8%, with the employer paying at least 3%. That would leave you to top up the other 5%. 

But in many workplace schemes the employer contributes the whole 8% or even more and the employee must only contribute 1%. You can then choose to contribute more.

By not joining the pension scheme as soon as you start work, you are missing out on this additional money from your employer. Contributions to a pension scheme in the early years, even if they are relatively small, can amount to a sizeable fund as they grow over the next 30 years.

Your pension pot should increase in value in the years you hold it. A pension is invested so you can expect whatever money you put in now to grow over time – through there may be fluctuations as the markets move up and down. The sooner you start, the more you should have.

Making contributions into a pension can also save you on paying tax. Your employer will take your pension contribution from your pay before it is taxed, meaning that you only pay tax on what is left, known as your net pay. This can be a good way to reduce your overall tax bill.

When should I start saving into a pension?
When should I start saving into a pension?

How do I decide whether to join a pension scheme?

If you're starting in a new job and money is tight, you may not feel that you can make large contributions to your pension. But try. If you can only make small monthly payments into your pension fund this is still better than nothing.

If you are:

  • in debt and paying a lot in charges and interest

  • putting a lot of your spending on credit cards

  • drifting into your overdraft at the end of the month and incurring charges 

then you might think you would be better off getting your finances straight before you start a pension. But do the sums. You will miss out on:

  • your employer's contributions (at least 3% of your salary, possibly much more)

  • your tax relief (20% of the gross contributions)

  • the investment income

The government's Money and Pension Service says there are good reasons to think about joining, or remaining in, a workplace pension, even if you are in debt or use an overdraft. The best reason to join a workplace pension, it argues, is when your employer contributes to it as well. If you're employed, auto-enrolment often means your employer has to match some of your contributions in a pension.

The other key benefit of paying into a pension is that the government gives tax relief on money paid into your pension.  This will usually mean for a basic rate taxpayer that every £80 you pay into a pension, the government will add £20 as tax relief.  Higher rate taxpayers will get a further 20% tax relief. Even if you do not pay income tax, if you ask your employer if it uses a ‘relief at source’ pension, the government will still add 20% tax relief to your contributions.

If you’re worried about money, talk to your employer to see if you can lower the amount you contribute. Employers have to pay at least 3% of your qualifying earnings on your behalf, but many pay in more. This means you might be able to pay in less, rather than stop altogether. 

But, the Money and Pension Service says, it might be a good idea to make a commitment to increase it again later.

Some people, with specific debt that must be paid-off in a short timeframe may need to cease paying into a pension on a temporary basis. But it is best to take advice. The government’s Money and Pension Service provides help.

How do I start saving into a pension?

When you start a new job your employer should give you details of how to join the workplace pension scheme. If you have any questions you can speak to the human resources or pensions department who will be able to advise you on how and when to start.

Normally your pension contributions will be automatically deducted from your pay before you receive it – making pension savings seamless and simple. If you want to increase your pension contribution amount you can ask your employer to adjust this for you.

If you move jobs you can keep your pension going with your old employer, although you probably won’t be able to make any more contributions after you have left. You can join another workplace pension when you get a new job – you can have as many pensions as you like as long as you keep within the contributions limit.

You can also transfer and merge pensions but you should seek independent financial advice before doing this.

Can I have a pension if I am self-employed?

If you're not employed by a company, but are working for yourself you  should still save into a pension. This is known as a personal pension and there are many companies that offer these. You still get the tax-relief on your pension contributions.

With a self-employed pension you will need to choose the provider and the type of investment you want to make, and to keep an eye on how it is performing.

With a workplace scheme you can choose different funds with different risk profiles, but the scheme administrators will choose which financial company actually runs the pension scheme.

With a personal pension you will have to pay the charges to run the pension, whereas an employer usually absorbs the cost of the pension scheme as it's regarded as a workplace benefit.

Therefore, if you can join a workplace pension it's likely to be better value than a personal pension. If you don't have the option to join an employer’s scheme then a personal pension is still a good idea because you can build up a retirement fund yourself so that you have a pension to rely on when you stop working.

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