When it comes to saving for retirement, it’s very easy to put it off. After all, there’s plenty of time, right?
The simple truth is, the earlier you start saving for retirement the better as your money has more time to grow. Leave it later and you’ll have to save much more each month in order to make up the gap.
Why saving sooner pays
For example, if you earn £25,000 a year and began saving 8% of your salary each year into a workplace pension from the age of 22, by the time you are 67 you could have more than £487,000 saved. This assumes your salary grows by 2.5% each year and you get a 5% investment return each year on your savings.
Leave it until you are 32, and, if you saved the same amount, you’d only have £258,000 set aside by age 67. To achieve the same amount as somebody who’d saved from 22, you’d need to save 15% of your salary each month.
Auto enrolment makes it easy
Until recently, if you wanted to save into a workplace pension, you’d have to sign up for it with your employer. But since 2012, all employees over the age of 22 and earning over £10,000 a year began to be automatically enrolled into workplace pensions.
This makes saving for retirement simple as there’s nothing you need to do. When you start work you’ll automatically be put into the pension scheme unless you actively decide you don’t want to pay in.
With auto enrolment, when you pay in your employer pays in too. If you choose not to pay in, you miss out on your employer contribution.
At the moment, auto enrolment minimum contributions are 5% with 2% being contributed from employers. From April 2019, this rises to 8% with 3% being contributed from employers. But, some employers are more generous so be sure to ask about the pension scheme.
If you don’t earn £10,000 you can always ‘opt in’ to the pension scheme and you’ll receive a letter or an email from the pension company your employer has chosen to explain how to do this.
Don’t rely on the State Pension
While the State Pension provides a safety net, it’s certainly not enough for a comfortable retirement which is why having your own savings is so important to give you financial freedom in later life.
The full new State Pension is just £164.35 per week but is dependent on your National Insurance record. You need 10 qualifying years on your National Insurance record to receive any State Pension and at least 35 years to receive the full State Pension.
It’s never too late
No matter how old you are, it’s usually always worthwhile paying into a workplace pension. Firstly, you get the contribution from your employer and, secondly, if you are a taxpayer, you get a top up from the government in the form of tax relief.
At age 55 you have the option to take all your pension savings as cash so even if you only have a small amount saved it could prove a useful nest egg.
With so many other financial pressures, saving for retirement can feel low on the priority list. But, the sooner you start the easier it will be to make sure you have enough set aside to do the things you want later in life – round the world cruise anyone?