Plan your pension

Retirement may seem a long way off, but the contributions you make to your pension pot in your early years have the most impact in later life.

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Pensions make your money grow

What’s a pension?

Pensions are a way of saving for retirement that means you lock your money away until you’re at least 55. Everyone who has paid National Insurance can get a state pension, but it’s not enough to live off, so it makes sense to start your own pension as early as you can.

But I’m so young…

The earlier you start a pension scheme, the more interest you’ll earn as your pension grows – known as compound growth. So for a secure retirement, the earlier you think about a pension, the better. Sarah Hindley, 23, says: “I’ve just started my first job and I’ve put pension planning on the to-do list – this way I won’t leave it until I’m 30 and it’ll be sorted.”

Why pensions? Why not some other type of investment?

Free money

Some jobs offer pension schemes where your employer adds between 6-10% on top of what you put in. This is probably the only time in your life someone’s going to give you free cash. So you might as well take it.

Pensions are tax-friendly

Pension schemes are tax-friendly. The government wants you to provide for your own retirement, so depending on your tax bracket, instead of taxing you, for every £80 you put in a pension the Government actually adds £20. By law all employers must now put you on a pension scheme if you earn over £10,000.

Pensions are locked away until you need them

Putting money in a pension stops you getting your hands on the money until you’re at least 55, so you don’t fritter it away on holidays. That said, if you desperately need money, having it stuck in a pension can prove frustrating.

How much should you save?

As a guide, a minimum of 10% of your salary needs to be saved each month over your working career. If you are putting less than this away, you need to top up later down the line.

What’s a Stakeholder pension?

These are a low-cost pensions and can be used by self employed people. Unfortunately they haven’t been too successful, mainly because they also don’t necessarily offer the best rates of return.

What’s a SIPP?

Self-invested personal pensions (SIPPs) are basically do-it-yourself pensions where YOU are responsible for managing and investing your money. So if you mess up, you’ve only got yourself to blame for your bankrupted retirement. On the other hand, if you think you’re more competent than the average banker then a SIPP could be a good option.

Pensions are good – but don’t rely on them

When it comes to managing your money, it’s often said that you should spread the risk around. This means not relying on one source of income in your retirement, but instead trying to build up several separate investments. For example, aiming to buy property and saving money into an ISA as well as starting a pension.

Where do I get a pension?

Start with an independent financial adviser. The consultation should be free, and a good adviser will help you work out the best options for you, taking in your age, lifestyle and attitude to money.

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Updated on 29-Sep-2015