Question: I've just started my first job out of university. When should I start saving into a pension?
The short answer is – as soon 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 will 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.
If you pay £50 a month into a pension fund when you're in your 20s, the money has longer to grow than if you start making the same contribution twenty or thirty years later.
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.
The sooner you start putting money in the bigger your pot will be, plus you get tax relief on your pension contributions which can give your savings a big boost. It's never too late to gain valuable tax relief and boost your retirement savings.
When you save into a pension the government gives you an incentive in the form of tax relief. This means that you get extra money paid into your pension fund in addition to the contributions you make.
Everyone can get tax relief on their pension contributions, up to a certain level.
You can get tax relief up to 100% of your annual earnings, 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.
Unless you go above the annual allowance, you will not have to pay any tax. In the 2020 to 2021 tax year, the annual allowance is £40,000.
If you're employed, your employer needs to offer you access to a pension scheme.
If your employer offers a pension scheme that you don't contribute to then you are effectively turning down free money. That is because many workplace pension schemes will match your own pension contributions with a similar or equal contribution of their own.
By not joining the pension scheme as soon as you start work, you are missing out on this additional money from your employer. What’s more, 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 thirty 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 significantly over time. So again, 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.
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. If you can only make small monthly payments into your pension fund this is still better than nothing.
However, if you are in debt and paying a lot in charges and interest, or you find you are putting a lot of your spending on credit cards, then you are better off getting your finances straight before you start a pension.
If you are paying into your pension but find yourself drifting into your overdraft at the end of the month – and incurring charges, then you would be better off saving your pension money to ensure you stay debt free.
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 you 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.
If you're not employed by a company, but are working for yourself it's still possible to have a pension. This is known as a personal pension and there are many companies which offer these types of pension.
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 still opt to 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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