In your 20s, one thing is for certain: retirement is the least of your worries.
In your 20s, one thing is for certain: retirement is the least of your worries. And rightly so. This is a period of establishment and upheaval, order, and disorder. Not just in your professional career but in relationships, your living situation, your life.
There are, quite simply, bigger fish to fry. Your pension is a savings account you literally can’t access for about another 30 or so years; a swathe of time longer than the couple of decades you’ve been milling about on planet Earth.
Some financial experts argue that the feeling of retirement as an intangible, far-away concept in the life of a 20-something is endemic: indeed, Hargreaves Lansdown found that 70% of young people find their pensions difficult to understand, and 24% of under 35s have no pension savings at all.
Ironically, picturing retirement distracts from the big picture, which is that starting early pays.
The earlier you save, the longer you’ll have to build a proper retirement warchest.
You already *have* a pension.
If you’re in full time employment, and you’re eligible, you’ll have been automatically enrolled in your workplace pension scheme. That’s the law, so unless you’ve manually opted out - then you have a pension. Congratulations! You are the proud owner of a retirement savings account.
Most people’s workplace pension will be in the shape of something called ‘defined contribution’. This means that the money you have in the pot is dependent on how much you’ve paid in and how your investments have performed over time.
It’s required that your minimum total contribution to your workplace pension sits at 8%. That’s made up by both yours and your employer’s contributions. Your employer pays 3% and you pay 5%. Plus, you get tax relief on your contributions from the Government.
So, you’re already kind of there.
But breaking the un-engagement endemic of the modern day 20-something takes a little something extra.
Firstly, you’ll need to see what you’re working with. Log in to your pension account - the details will have been sent to you when you joined your current company - but if you’ve lost them just try speaking to your manager or HR. If you’ve not logged in before you’ll probably need to set a password, but this will depend on your pension provider (the company who look after the pension).
Secondly, check your current contribution level. If this is your first foray into the finances of your future, this will probably be set at the minimum contribution level. The number you see (likely a percentage) indicates the percentage of your salary that is directed into your pension.
Thirdly, if you feel like you can spare more money, then why not go for it? Crank up the contribution. Some employers pay in more than the minimum, so it’s worth maximising their contributions. Some may even match your contribution, up to a certain amount.
Ask your employer how much they’re prepared to give you and get as much as you can into your pot. It’s a win win sort of scenario.
Some people like to use the rule of thumb of saving half of your age as a percentage of your salary. So, for example, a 24-year-old would divide 24 by 2. That’s 12. Or we’ll call it 12% - and maintaining this level throughout your savings journey. But remember, of this you only pay 9%, as your employer has to make up the other 3%.
If you put off your pension saving to another 10 years and start when you hit 34 – then the rule of thumb figure changes to 17% - or 14% (remember, your employer pays a minimum of 3%) of your own money coming out of your pay packet every month.
Freelancer or self-employed?
If you’re a freelancer or are self-employed, you’ll have to manually set up a pension - and won’t benefit from the employer contributions that make workplace pensions so enticing.
That doesn’t mean that it isn’t worthwhile. In fact, you’ll still receive tax relief on your contributions.
What you will need to ensure is that you shop around. Take time to consider your options, and if you feel lost or unsure, use the helpful resources that are available from MoneyHelper and if may be worth seeking financial advice. MoneyHelper can help you to find a reputable financial adviser.
The dent of rent…
But saving is not so simple. Whilst young people are less likely to have got a foot on the property ladder, a large portion of their monthly income is spent on rent.
Did you know that 32% of all renters in the UK are aged between 25-34? A House of Commons inquiry in 2018 found that 65% of 18–24-year-olds rented a property. This number fell - albeit slightly - to 42% amongst 25–34-year-olds.
When you then consider that in some areas monthly rent can constitute half of your salary, the rent dent starts to rear its ugly head.
More money is being spent than ever on renting - blurring the discourse between owning a mortgage and paying monthly rent.
Yet, as an example of the deeply rooted influence Covid has had on our daily lives, marred further by a rising cost of living, more and more young people are continuing to live with their parents rather than flying the nest.
Ultimately, young people typically have fewer financial obligations than people in the mid-to-late thirties: from supporting a family to owning a mortgage, there might never be a better chance to begin building a solid base for your pension.
Why time is on your side
And so, we’ve come to the crux of the matter. Time is your friend, and that’s largely because of compound interest (the interest you earn on interest over time).
Your pension can be invested into the stock market, shares in companies (also known as stocks or equities), government bonds and cash. The aim is, over time, that these investments help your pension to grow – and with the added power of compound interest, your money has a greater potential to grow.
As long as you continue to contribute to your pension, you’ll really notice the effects of compounding.
Do that over the course of, say, 30 years - whilst making regular contributions, benefitting from your employer’s contributions and tax relief… you’re on to a winner.
Of course, the value of your investments is never guaranteed, and losses are as much a part of investing as gains.
So, when was the last time you reviewed your pension? It’s easy to look into. Your employer or pension provider will be able to help, or you can check via your online pension account.