Pension contributions – why putting in cash at an early stage helps

IFP - january coins

As the old adage goes, ‘never put off until tomorrow what you can do today’. This certainly applies when it comes to starting a pension plan.

For those just starting out in life, there can be a lot of calls on their cash – saving for a deposit for their first home, dealing with student debt, or paying off a credit card.

Pensions not only offer a great way of providing for your future, they come with the added benefit of tax relief on the amount you put into your plan, within HMRC’s annual and lifetime limits. It makes good sense to review your pension regularly and think about topping it up whenever your finances permit. You’ll be able to claim the valuable tax relief available on your contributions – 20% for basic taxpayers, 40% for higher-rate taxpayers.

It’s worth remembering that for every year you put off saving into your pension, potentially the more you will need to contribute during the later years of your working life.

However, a simple example shows why starting to save in a pension plan at an early age really makes a difference.

Starting early pays

Starting early can have a real impact on the ultimate size of your pension fund. Take the example of someone saving £100 a month for 40 years (25 until 65 years of age); whilst they would put away the same amount into their pension pot as someone starting 20 years later putting in £200 a month, the early starter stands to accumulate a much bigger fund. Based on (a projected but not guaranteed) 6% investment growth throughout, the early starter would have a fund of around £190,000 whilst the later starter would have built up around £90,000.

It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation, are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.

What the state has to offer

The equalised state pension age scheduled for 2018 is set to increase in stages from age 65, eventually reaching age 68 between 2044 and 2046. A full rate new single-tier state pension will be £155.65 a week for someone reaching their state pension age after 5 April 2016.