With the cost-of-living crisis impacting more and more people, many people are struggling to make ends meet due to reduced income and rising energy costs. A recent study published by FTAdviser, stated the many young people are delaying their pension contributions to maximise their take-home pay. While this makes sense, it can have significant long-term consequences.
We at Resolve believe, that it is important for young people to start contributing to their pensions sooner rather than later if they want to live their desired lifestyle in retirement. Here are some reasons why young people shouldn’t neglect their pension contributions…
Having an income in retirement can give you peace of mind
Many people look forward to retirement age because it offers you the chance to do the things you have always wanted to do – travel the world, take up new hobbies and spend more time with friends and family.
According to research by Which?, the average comfortably retired couple spends around £28,000 each year. This is a significant sum, especially if you plan to retire before the State Pension Age.
You don’t want to reach retirement age and start to worry about your money running out. You want peace of mind to know that you have enough money to support your desired lifestyle in a sustainable way.
Don’t forget employer contributions
Auto-enrolment means that your employer simply deducts some of your wages and adds it to your pension pot. The minimum contribution that they have to make is 8% of your salary, of which at least 3% is paid by your employer. What this means is that when you make a contribution from your salary, it is being topped up with free money from your employer. This is a valuable way to grow your pension pot.
Bear in mind that 8% is only the minimum contribution so you can choose to increase this amount if you want to put more aside. Some companies will also offer to increase their own contributions when you do too.
Pension contributions = tax relief
We can all benefit from tax relief from the government when we make contributions to our pensions, another valuable way of boosting your wealth for the future. To encourage more people to put money aside for retirement, the government tops it up with a little extra.
For example,
- if you are a basic-rate tax payer, you will receive 20% tax relief,
- if you are a higher-rate taxpayer, you will receive 40% tax relief,
- if you are an additional-rate taxpayer, you will receive 45% tax relief.
For example, if you pay the basic rate of tax, it will only cost you £80 to make a £100 pension contribution, as the government will add an extra £20 in tax relief.
You can benefit from compound growth
It is important not to neglect your pension contributions because when you are young you have more time to take advantage of compound growth. This is when you receive returns on previous growth. In many situations, this starts small but in the long term it can add up to significant amounts.
According to research published by FTAdviser, a young person in their 20s could miss out on as much as £21,000 in lost growth if they put off pension contributions for the first five years of their career. This is why it is so important to contribute to your pension while you are young.
If you would like to know more about how to grow your pension for a comfortable retirement, we can help. Please email info@resolvefs.co.uk or call 01932 943028 to speak to one of our financial advisers.
Please note: A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Workplace Pension are regulated by The Pensions Regulator.