Everyone tells you that you should start saving for a pension now if you haven’t already started but why? Here are the benefits of saving for a pension now!
If you put £250 a month into a pension pot at age 30, you will save £30k more than if you started at 40. The sooner you start the more you accumulate.
The price you pay for your pension investments now is likely to be considerably more expensive now than what it was 10 years ago. The same should apply in another 10 years, so invest into your pension now rather than in 10 years time where you will get less for your money.
The government love it when you take action and invest into your pension. Every time you do, they give you a tax break, that gives you effectively an extra 20% or 40% extra (depending on if you are a basic or higher rate tax payer).
If that wasn’t enough, employers often put in pension contributions to top up your pension as well. Some even match contributions upto a certain percentage.
So taking the example, of your £250 a month contribution earlier, your employer might match it so that it becomes £500 in total, and the government might give you an extra 20% via a tax break on your contribution so it becomes £550 in total.
Over 10 years, this becomes £66,000 extra in to your pension pot. And this is all before we even mention Compound Interest…
Compound interest means that you earn interest on the interest already accumulated.
This helps build a snowball effect, that is very powerful. Below is a simple example of how compound interest works:
- In year 1, you have invest £100 and you get a dividend of 10% so £10 (which you reinvest into the pension).
- Now you have £110 in year 2, this also grows by 10% but as it is 10% of £110, it is actually £11 interest you receive so you now have £121 (rather than £120: 2x £10 interest a year).
- 30 years later and that £100 contribution has grown to £1744 (assuming an amazing rate of 10% growth a year).
- Without compound interest, if you just assumed you were getting £10 a year interest from your £100 investment, after 30 years you would have only £400.
Start earlier, retire earlier
One of the benefits of saving for a pension is that the sooner you start saving for retirement, the bigger pension fund you will be able to accumulate. The sooner it reaches a size that will be able to support you for the rest of your life, the sooner you will be able to retire to enjoy the things that you want to do.
You don’t want to rely on the State Pension
Living on just the state pension is like living only on benefits. It is very hard.
The state pension isn’t sufficient enough for people to live on and who knows what it will be like when you retire. Saving for a pension now, reduces your reliance on the state pension.
Earlier you start, easier it is
If you start contributing now, you will soon forget that you ever had that money to spend every month. If you put it off now, what do you think will be different in 10 years time that will make you start saving into the pension then?
In 10 years time you might be earning more than you earn now, but you are also likely to have bigger bills and bigger expenses. Don’t ignore all of the benefits above on the misguided belief it will be easier to save in the future. It won’t.
The benefits of saving for a pension are clear. The easiest thing is to start now!