Life is a funny thing, it seems like the older you are the faster the years go by. The ten years between age 10 and 20, for example, is like a lifetime compared to the ten years between 20 and 30. And my dad has reliably informed me that this trend continues to accelerate.
Why am I telling you this? Because if you’re under 40, you may think that retirement is still too far away to really consider, but in reality, it’ll be here before you know it.
When you’re young, less is more
It’s basic maths – say you wanted to save £100, if you did this over 10 months then you’d only need to put £10 away each month, but if you did it in two months, you’d need to tuck away £50. Now think about this on a much bigger scale.
Say you want a ‘good’ pension pot with an annual income of £30,000 and you’re planning on retiring at 67 – you’d need about £420,000 in your pension. And that’s assuming you hit the UK’s average life expectancy of 81!
Assuming you earned no interest, dividends or anything else, starting at 21 you’d need to put away £760.86 each month to meet this goal. But start 10 years later and this jumps to £972.22, and if you wait until your 41 this would need to be £1,346.15 to reach your target!
These numbers might seem ridiculous to you, which leads us nicely to our next point:
Your money can make money
You know the saying, “it takes money to make money”? Well, when you invest in a pension your money can make money. It doesn’t go and get a second job or anything, but it actually benefits from a really cool thing we like to call ‘compounding’. This is when your investment earns interest or is paid dividends and those are then reinvested – by doing that, your profits can then make more profits, then those profits can make profits and the longer it does this for, the greater the impact.
Going back to the example earlier – if you opened a Wealthify pension at 21 with the aim of retiring at 67 with £420,000 in the bank then you’d only need to pay in £210 a month – that’s £550 less than if your money is doing nothing at all.
A 25% top up on your money
Everyone likes to get something for nothing, and when you pay into a personal pension you get tax relief. The way it works is this, say you paid £80 into your pension, the government would top it up and make your £80 worth £100 – essentially giving you money to help save for your future. And what’s more, this extra money will also be invested and be able to benefit from compounding – it really is a win-win!
People are living longer
People living longer is great, but according to UN projections, in the next 50 years life expectancy is likely to increase to 87. While that may not seem like a huge amount – it’s just six years after all – you need to remember that this is an average, and it’s six more years that your pension will need to last for. Those six years would mean that you need to increase your pension target to £600,000 to maintain your £30,000 a year drawdown.
In it for the long-term
We’re big fans of long-term investing at Wealthify, and all the research backs us up on this. If you go back through the data, which our investment team does over and over again, you’ll find that anyone who invested in the FTSE 100 index for any 10-year period from 1984 until December 2020 had an 89% chance of making a gain .
Thinking about market movements
If 89% made a gain, then what about that remaining 11%? The longer you’re invested for, the more chance you have of riding out any volatility – especially if it’s caused by short term changes. While starting early doesn’t promise that you won’t hit volatility as you’re coming to the end of your working life, it does mean that your money will have had a longer time to work harder.
What state pension?
This is a scary one for a lot of young people – and a bit annoying as well – but we really can’t count on the state pension being around when we retire. The government has already shifted the responsibility on employers with the workplace pension, and the Government’s Actuary Department has estimated that this fund could end by 2033. They may replace it with something else, it may have an overhaul, it may be eradicated altogether – nobody really seems to know yet, but it’s worth preparing yourself for it all the same.
The State Pension isn’t that great
Could you live off £175.20 a week? That’s the how much you’d get from a full new State Pension. While that’s a nice bit of pocket money, it’ll probably just to cover all your food and bills for the month. If you want to do anything like have a social life, go on holiday, or even pay rent the state pension probably won’t cut the mustard.
In addition to that sweet 25% top-up we mentioned earlier, up to £40,000 a year (or your entire yearly earnings) can be put into a pension completely tax-free. All the profits you make are also tax-free, as are the profits on those profits. Essentially, a pension allows you to build up your pot without HMRC getting their fingers on your savings.
Choose how you invest
Something that’s pretty cool about personal pensions is that you have a whole heap of choice. That doesn’t just mean a lot of providers, it means you could pick an ethical pension if you wanted to, and even choose how much risk you take on with your pension. If you choose to have a pension with Wealthify, you can change your investment style as you go – fitting in with your current circumstances and attitude to risk.
Build good financial habits
Pensions are dead boring, there are no two ways about it, but we all know that we need to save for the future. By starting a pension sooner, you can have more time to build good financial habits. With a pension, your money is locked in – currently until you’re 55. This means that everything you put in, stays in, which is good if you like to take some money out of your savings every now and again for a ‘treat yo self’ day!
Think of the children
Nobody likes relying on others, it goes against the human grain. But unfortunately, sooner or later, age hits us like a ton of bricks. If you haven’t built up a decent pension, you could be forced to rely on your children for financial support or even need to move in with them. It’s only fair, really, seeing as you brought them up – but it’s always nice to have other options available to you.
It’s easier than you think
If you’re ready to start a pension now, there’s not much stopping you. With robo-investors like Wealthify, starting a pension is a few clicks, a couple of questions, and some bank details away. You could even put your pension on autopilot by setting up a direct debit and letting our experts handle the rest. You could keep tabs on your performance daily, or you could just leave it to do its thing – whatever you fancy.
- This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £242,154. If markets perform better, your return could be £779,953. Values correct as of 25/03/2021
- Data from Bloomberg compiled by our investment team
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.