Pensions in your 20s and 30s

During your 20s and 30s, retirement might seem a long way off – after all, it's probably still at least 30 to 40 years away.

However, it's the ideal time to get your pension on track. The State Pension age is rising, life expectancy is increasing and the earlier you start to save, the less you'll have to put away to meet your goals for retirement.

Why invest into a pension?

Pensions provide a tax-efficient way of saving for retirement. Contributions to a pension fund, up to an annual and lifetime limit, are eligible for government tax relief – in other words, your money back, which you can potentially grow over decades. If you’re a basic rate tax-payer (in the 20% tax band), what this effectively means is that for every £80 you put in, your pension pot grows by £100.

The majority of employers now offer a workplace pension scheme; by 2017 this will extend to all employers. This will usually be what's called a defined contribution scheme, which works as follows:

  • Your employer will take a percentage of your salary and contribute it to your pension for you, before you pay Income Tax.
  • Your employer will then top this up with a contribution of their own, which must be a minimum of 1% of your salary (increasing to 3% by October 2018).

The money in your pension fund will be invested by the provider your employer has chosen, with the aim of generating good returns. You will usually have some choice over where your money is invested, but most providers also offer a ‘default fund’ with the aim of generating returns and growing your pension pot.

This allows you to make regular pension contributions in a hassle-free way, and get 'free money' from your employer for your retirement.

The benefits of early pension contributions

You may think it's too early to start thinking about retirement, but the earlier you start contributing, the more you can save – even if you can only afford to make small contributions at this stage – thanks to compound growth.

Compound growth is growth earned from growth, and the benefits are greater if you save over a longer period of time. Here is an example using cash savings accounts with a fixed rate of interest:

  • John saves £40 per month from the age of 40, with an interest rate of 3%. By the age of 60 he has a pot of £13,237.74, including £3,597.74 in interest.
  • Sarah saves £20 per month from the age of 20 at the same interest rate. By the time she reaches 60 she has a pot of £18,633.80, including £9,013.80 in interest.

So even though they both put away the exact same amount of money, the fact that Sarah gave her money longer to earn interest meant that she ended up with a bigger pot than John.

Another benefit of contributing to a pension early is that your investments have longer to recover from short term falls in the market. You may also be able to take more risk at this early stage, in the hope of achieving higher returns. Take a look at our guide to investment risk & reward for more information on choosing your level of risk.

What happens to your pension when you change jobs?

It doesn’t matter if you change jobs, the contributions you make are recorded accurately and remain invested for you. You can continue to pay into a pension you started at a previous employer after you’ve left, although you may no longer qualify for certain benefits. If you find yourself with several smaller pension pots from different jobs, you can consolidate them into one if you wish – although you should take advice before you proceed.

You will usually have some choice over where your money is invested, but most providers also offer a ‘default fund’ with the aim of generating returns and growing your pension pot for when you one day retire.

What next?

If you haven't got a pension:

  • Speak to your employer about the company pension scheme OR
  • Consider starting your own personal pension

Explore your options – read our guide to types of pensions.

If you already have a pension:

  • Consider whether you could afford to increase your contributions, particularly if you still have relatively few financial commitments
  • Check up on your fund to make sure your investments are performing well
  • Consider increasing your contributions if you get a pay rise – that way you won't notice the difference!
  • Make sure you have a well topped-up 'rainy day fund' in place.

If you'd prefer some advice…

If you're short on time to figure out the details of your pension and want some guidance on getting your pension off to the right start, including recommendations of funds and assets to invest in, it's worth speaking to a financial adviser.

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Last updated: 04 June 2015