When should you start paying into a pension?

The earlier you start paying into a pension, the better you can expect your quality of life to be in retirement. Picture: John Devlin

As the age of retirement rises alongside the increase in life expectancy, not being able to retire until the age of 70 or 80 is becoming an all-too-real prospect for some graduates. Those who are only beginning to pay into a pension won’t be able to access their money until much later in life. However, according to the Pension Advisory Service, it’s never too early to start paying into one.

When should I start paying into a pension?

“‘The sooner the better!’ As Einstein said. There is no stronger force than the power of compounding, which referred to the benefits of saving over the long term and hence the sooner you start saving into a pension, the more likely that you will be able to build up a meaningful sum,” Lauren Rushton, spokesperson for the service explained. “The rough rule of thumb is that your pension contribution as a percentage of your salary should be half your age at the time you start contributing; so the younger you are when you start paying into a pension, the easier it is.”

She added: “Pensions are a tax-efficient way of saving money over your working life and by paying in earlier you can build up substantial pension benefits to help provide you with an income in later life, when you want to work less or retire. As you go through life, whether you’re in or out of work, your ability to contribute to a pension will make a big difference to the quality of your life in older age.

“Starting sooner just means more time to contribute to and shape your pension fund, helping to prepare the foundations for a more comfortable retirement. Remember, no matter how old you are, there is always value in saving into a pension scheme, particularly if your employer is also willing to contribute.”

The state pension will only provide the basics in retirement. The current state pension is £115.95 a week, which works out about £16 per day. Once you retire, it’s likely that you’ll have paid off your mortgage and you’ll no longer pay for public transport. But if you want a better standard of living, it’s best to have as much saved as possible. Most websites have a pension calculator that gives you an idea what your income will be when you retire.

What options are available to me?

“There are several types of pension schemes, they all have the same aim – to help you save money and provide you with an income when you’re older,” Rushton explains. “Some may be run by your employer, others you can set up by yourself. And saving into one scheme doesn’t mean you can’t save into another or use other tax-efficient savings plans like ISAs. You can even save into a pension whilst drawing a pension.”

Workplace pension scheme

“Under the Government initiative automatic enrolment all employers are obliged to enrol eligible employees into a workplace pension, provided they are not already in one,” says Rushton. “Employers also have to pay a minimum contribution into the pension scheme for their eligible employees. To be eligible for automatic enrolment you must be at least 22-years-old, have not reached State Pension age, earn more than £10,000 per year and work in the UK (under a contract). If you are eligible, your employer will automatically put you into the pension scheme. If you don’t want to be in the scheme, you can opt out. Your employer is required to continue automatically enrolling you every three years so if you really do not want to be in the scheme, you will need to keep opting out. (Automatic enrolment is in place for large employers. It is currently being rolled out among smaller employers so you need to check the position with your employer.)

“If you do not meet the eligibility criteria you do not have to be automatically enrolled but, you do have the right to ask to join your employer’s scheme and may even receive employer contributions.”

Personal Pension Scheme

The personal pension may work best for you, says Rushton. “A personal pension is a contract between you and a pension provider and is set up by you, the member. You can have a personal pension if you’re employed, self-employed or not working. If you’re employed, your employer can also contribute to your personal pension.”

What impact has the increase in life expectancy had on pensions?

“Over a number of years, life expectancy has been improving and we are now all expected to live longer,” says Rushton. “This is a good thing but, of course, it does mean that your pension pot needs to last for longer,” according to the Pension Advisory Service. “As a result, the changes in life expectancy means that people saving for retirement today, need to make sure that their future financial plans also include the possibility of living much longer lives. This means making adequate pension contributions and making well-informed choices when reaching their retirement age is vital to ensure that your pension provision doesn’t run out.”

What tip would you give people about saving into a pension?

“Saving into a pension is essential if you are hoping to have enough money to stop working when you want to and to do the things that you want in retirement. The one tip that we would give to people is to ask for help. Pension can appear quite daunting with complicated rules and indecipherable language. The Pensions Advisory Service (TPAS) is a Government public service that is there to help people with their pensions questions and issues. TPAS deals with pension questions every day so they can help you with your question. Pensions can change lives so make sure you make the most of yours.”