It’s never to early to start a pension

It’s never to early to start a pension

While being a crucial financial aspect of life, the concept of initiating a pension is often challenging for many individuals, leading them to postpone it until later stages. This reluctance may stem from misconceptions about the time required to build a substantial savings fund or the discomfort associated with aging and future planning. Regardless of the reasons, it’s vital to understand that commencing a pension early can result in significant rewards later on.

Commencing a pension early can lead to remarkable benefits, thanks to factors like compound growth, making it easier to maximise your savings over time. If you find yourself pondering when is the optimal time to start a pension, you’re not alone. Planning for an uncertain future can be perplexing. In general, the answer is to start as early as possible. The more time your money has to accrue and grow in your pension fund, the greater financial freedom you’ll enjoy in retirement.

Even if you begin contributing to a pension in your twenties and cease at 40, your final pot may surpass that of someone who starts contributing more at the age of 50, all due to the impact of compound growth. The adage “you’re never too young to start saving into a pension” holds true. Don’t be deterred by the association of pensions with retirement; their benefits extend to individuals of all ages.

Compound growth occurs when you achieve growth on both your capital and the original growth generated by those savings. This compounding effect allows you to accumulate greater value over time, especially with a higher compound frequency.

For instance, with a pension pot of £5000 and a 10% interest rate, the compounding effect would result in £5500 after the first year. As interest continues to compound, your money grows faster, emphasising the advantage of starting early.

Using the example above, if you initiate your pension at 20 and make no additional contributions after the initial £5000, you might accumulate around £163,000 in 35 years. It’s crucial to note that pension performance is subject to market fluctuations and not guaranteed, impacting the final figure.

Taking advantage of tax relief is a unique aspect of pensions. The government enhances the contribution by an additional 20% (providing you are eligible to receive tax relief). For example, if you contribute £80, the government will contribute an additional £20 to your pension, giving you a total contribution amount of £100.  If you are a higher-rate tax payer, you can claim any additional tax relief via self-assessment. This tax relief, combined with employer contributions and compound growth, positions the pension as an efficient way not only to save money but also to grow your future fund.