The benefits of starting your pension early

Despite being one of the most important financial aspects of life, many people have a hard time approaching the concept of starting a pension, often ignoring it until much later on in life.

This might be the result of a misconception about how long it takes to build a decent savings pot, or maybe it’s down to the uncomfortable reality of ageing and the difficulty of planning for the future. Whatever the case happens to be, it’s important to recognise that starting a pension early can yield some incredible rewards later on down the line.

Due to some great benefits like compound interest, the sooner you start saving into a pension, the easier time you’ll have maximising your money.

If you’re thinking about what to do with your own pension, or you’re feeling apprehensive about approaching the subject of your future finances, here are some important tips to note down.

When is the best time to start a pension?

If you’ve recently found yourself asking, ‘how early should I start saving into a pension?’ Then you’re not alone – it can be confusing to work out how much you’ll need for the future, especially when you have no idea of knowing what that future looks like yet.

Generally, the answer is as soon as you can. The longer your money has to rest and grow in your pension pot, the greater the financial freedom you will have when you finally retire.

Even if you start saving into a pension when you’re in your twenties and then stop contributing when you’re 40, there is every chance you will have a bigger final pot than someone who started making bigger contributions than you at 50. This is due to the effects of compound interest.

You’re never too young to start saving into a pension, so don’t let the fact that pensions are built for retirement deter you.

Compound interest

Simply put, compound interest is a bit like double interest – the compounding effect happens when you earn interest on both your savings and the interest that your savings generates.

This can enable you to accumulate much more value out of your savings over time, as the compounding effect has longer to get to work.

Say you had a pension pot of £5000 and an interest rate of 10%; after the first year, you would have £5500 in your pot. The year after this, you would receive interest on the interest gained in the first year, which would be 10% of £500 – £50. This means that in the second year, presuming you didn’t make any more pension contributions, you would have £5550.

However, this compounding effect continues to happen as you add to your pot, and if you have a high compound frequency, your money will grow faster.

Because of this effect, the earlier you save into your pension pot, the more value you will get from your contributions.

Using the above example, if you started your pension at 20 and never contributed any money into it other than your initial £5000, you might end up with around £163,000 in 35 years’ time. It’s important to note that like all investments, pensions are subject to change depending on how they perform in the stock market, so the final figure could be vastly different because of this factor.

Taking advantage of tax relief

The pension tax relief benefits are what make the pension unique. When you pay into a pension, the government tops up the amount you pay in at the highest rate of tax you usually pay, so you effectively make money every time you contribute.

Say you contributed £100 to your pot – the government’s added 20% on top of this gives you £120, which may not seem like much, but the longer you have to take advantage of this, the more you can grow your ultimate pot.

When combining employer contribution, compound interest, and tax relief payments, the pension looks like an incredibly efficient way of not only saving money but growing your pot for the future.

Get started with iSIPP

We believe that people should have control over their own financial futures. We strive to provide people with this control, and we do so by using our top technology, experience, and talents. Plus, we are FCA regulated so you can be confident your money is in safe hands.

Through iSIPP, you can consolidate your pensions, choose where they’re invested, and take your financial agency back into your own hands. If you have any questions about our services, our friendly team is here to help, so get in touch when it best suits you.

Enjoy reading this blog? 

Why not try reading one of our other blogs on pension consolidation:

SIPPs and workplace pensions – What’s the difference?

How big a pension do you need to retire? 

Or visit our pension consolidation page here. 

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.