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 at least £20. By law all employers must now put you in a pension scheme if you are 22 or older and 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 should be saved each month over your working career. If you are putting less than this away, you will likely need to top up later down the line. If you have debt like credit card bills, focus on paying these off first. But do aim to save into a pension as well.

What’s a Stakeholder pension?

These are a low-cost pensions and are often used by self-employed people. However, they are not necessarily the best value for money – you may find cheaper pension products, or ones that offer more investment choice.

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. They can be a cheap option, but will require you to monitor your investments going up and down and choose when to buy and sell. 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?

There are lots of guides on the internet about starting a pension, or speak to your HR team if you’re employed and want to discuss your workplace scheme. For a more thorough analysis of your finances, speak to 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 24-Oct-2017