As the old saying goes “money doesn’t grow on trees” and sadly pension pots aren’t found at the ends of rainbows either. Building a meaningful pension pot takes time and, frankly, some degree of effort and sacrifice. Essentially, you’re giving up part of your income today, in order to provide an income for yourself at some point in the future. Here are three top tips to help make this happen.
1 - The earlier you start the more time you have on your side
Even though young adults are typically without financial dependents, making ends meet can still be a challenge, particularly for people who are living away from the parental home. Zero-hours contracts, short-term and fixed-term contracts, temping and spells out of work are all par for the course for many of today’s young adults. That being so, the order of priorities for most young adults should be: building up a cash cushion of emergency savings; paying off high-interest debt (or at least getting it to the point where it can be moved to a lower-interest credit vehicle) and then looking at pension savings.
2 - Decide if a workplace pension is the right choice for you
If you are working, you may well find that you are automatically enrolled into a workplace pension scheme unless you actively opt out and that even if you do opt out, you are enrolled into the scheme after three years unless you choose to opt out again. The advantage of workplace pension schemes is that the government requires the employer to make some level of contribution. The disadvantage of them is that the employer is only required to contribute part of the mandatory minimum level of contribution, so unless they choose to pay more, as an employee benefit, the employee will be required to make up the difference. Private pensions are much less likely to benefit from employer contributions (in principle employers can choose to contribute but since they are mandated to run workplace pension schemes they may be unwilling to provide pension contributions through another channel as well), but they offer much more flexibility. In short, if you can commit to regular saving each month, employer contributions can boost your pension pot nicely, however, if this is too much of a challenge, it’s better to save what you can afford into a private pension than to go without any pension provision at all.
3 - Remember pensions are only part of financial planning
For people who earn an income, by any means, pensions are a very tax-efficient way of saving for retirement and adults in employment can also benefit from pension contributions. At the end of the day, however, pensions are just one way of saving for the future, there are other possibilities. For example, those aged between 18 and 40 will soon be able to open a Lifetime ISA, which will offer an alternative and more flexible means of saving for retirement. Ultimately any savings or investments you can grow over your working years will form a contribution to your lifestyle in retirement. With this in mind, one positive step all adults can take, regardless of their age or financial situation, is to make an active commitment to managing their finances to the best of their ability, starting with basic budgeting skills. The simple act of keeping track of your money and understanding where it is going and why will help you to make the most of what you have and to make intelligent decisions about where it is appropriate to spend money in the present (accepting the fact that it’s important to enjoy life in the here and now as much as you can) and where it is appropriate to save and invest for the future.
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested