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This series offers easy tips for managing your pension, for every decade of your life: in your 20s, 30s, 40s, 50s, 60s or 70s.
At the start of your career saving towards a pension is not a high priority. But a small commitment early on could make a massive difference to your retirement pot when you need it.
It may seem like a lifetime away and there is a whole list of financial priorities to tackle. But once you have budgeted for all of these expenses, it’s time to think about how to save and invest for your future. The earlier you start, the easier it will be.
Anyone who is 22 or over and is employed, earning £10,000 or more, will be automatically enrolled into a pension scheme chosen or run by your employer. Via this, a minimum of 8pc of your earnings between £6,240 and £50,000 will be invested for your future. You will contribute 4pc, your employer at least 3pc and 1pc via a Government top-up known as tax relief.
If you opt-out of this then you are foregoing the money from your employer and the Government.
All jobs should come with a pension so when starting a new job ask about the details. Read the materials and sign up to take full advantage of all the employer benefits available to you. Sometimes employers are willing to put in more than 3pc if you also put it more, so take advantage of what you can afford.
Your pension is essentially an extension of your pay and you would not turn down a pay rise. It is important to understand what is being offered.
Draw up your budget
Tom Selby, of pension provider AJ Bell, said one retirement rule of thumb is to aim to save half the age at which you started as a percentage of your salary each year.
For example, if you start saving at 20 then aim to put away, combined with what your employer contributes, 10pc. Delaying until 30 means you will have to target 15pc.
Mr Selby said: “Clearly all of us only have so much money and it’s unrealistic to save every penny we earn, but writing down your outgoings and incomings is a good first step to understanding what you truly can afford to set aside for later life.”
If you can afford to save more into your workplace pension, your contributions will benefit from pension tax relief.
This will automatically convert an £80 contribution into a £100 in a pension, while higher and additional-rate taxpayers can claim back even more from HM Revenue & Customs.
You should take advantage of any savings they have been able to make during the lockdown by investing more into their pension, said Kate Smith, of Aegon, a pension provider.
Young people were among those whose benefitted from the lockdown, an Aegon report showed. Some 45pc of those aged between 18 to 34 said they had increased savings by an average £218.
David Stevens, of insurer LV=, said saving £50 a month into a pension from the age of 25 could result in a pension fund of £72,600 by the time you are 65, but only £22,700 if you started aged 45. He said: “It’s surprising just how much a small investment can grow over time.”
The longer you wait to save in a pension the more you may have to pay in later in life to save enough to meet your needs in retirement.
Ask Kate a question | The Telegraph’s pensions doctor
Think about your investments
The amount you pay into your pension is key to how much you will have by the time you retire but the investments you choose will make a difference.
If you are in your 20s you should not be afraid to invest in risky investments like stocks, Brian Henderson of pensions firm Mercer said. You may have between 30 and 40 years until you retire and you can afford to lose money in the short term as you have plenty of time to make it up.
Governments and investors around the world are increasing their focus on environmental factors like climate change, social factors such as human rights, and governance factors such as executive remuneration.
If you are interested in investing some of your savings in environmental, social and governance factors, there are “ESG” funds that you can ask your employer to invest in.
If you do not make any decisions about your investments, your auto-enrolment pension will be chosen for you by your employer and you will be placed into the "default investment fund".
This benefits from a cap on charges currently set at 0.75pc but it might not be designed based on how you might want to invest.
He said: “At the very least you should have a look at how your money is being invested into and make sure you are happy with it."
Once set up, sit back and relax
Once you have chosen your investments you should not be tempted to keep changing it on a regular basis.
The more you change your investment strategy, the more you are likely to lose value, studies have shown. Trading investments too often can add extra costs with no guaranteed payoff.
It’s important to view your pension as a long-term investment, even during market crashes, according to Claire Trott, of wealth manager St James’s Place.
"Difficult though it can be, it’s important to sit tight and keep sight of your long-term objectives. At this stage of life, it’s far more important to have a solid retirement plan with a portfolio that reflects your long-term investing horizon,” she said.
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