Understanding the value of starting your retirement planning early

Published on December 16, 2022 by Andrew
A man in bed and reaching for an alarm clock

As auto-enrolment turns 10, a recent report from Standard Life finds that more than a quarter (26%) of UK workers don’t know how much they are contributing to their workplace pension.

Despite this, nearly 3 in 10 (29%) are currently contributing pay more than the auto-enrolment minimum. Reasons for workers contributing more included wanting to pay in as much as they could afford, using a recent pay rise to increase contributions, and looking to take maximum advantage of compound growth.

Paying more than the auto-enrolment minimum is a great way to benefit from additional tax relief and build towards your dream retirement.

But, arguably, the most important thing you can do is to start contributing early. Here’s why.

1. Having a long-term plan can help you to save more

Recent studies have found that people with a 10-year plan are better focused on their future selves and subsequently save more.

One of the simplest benefits of long-term financial planning is that it forces you to look long term and think about what your goals and dreams are. Once you have taken the time to picture your dream retirement, you’ll have something to aim towards.

Your long-term goal will have tangible costs attached. We can help you to calculate these and put a plan in place that makes your goal achievable.

2. The earlier you start, the more time your investment will have to grow

2022 has been a tough year for markets still reeling from the coronavirus pandemic. Soaring inflation, rising energy bills, and the war in Ukraine have created an uncertain climate, manifesting as periods of short-term volatility.

As we know, though, short-term blips are to be expected. The general trend of the markets, meanwhile, is upward.

The earlier you start investing for your retirement, the longer your investment will have to grow.

You’ll need to remain patient, stay focused on your long-term goal, and avoid the emotional, knee-jerk reactions and trend-chasing that could adversely affect your pot. 

Ignore the noise, though, and you should have plenty of time to see your investment grow.

3. Compound growth was Einstein’s 8th wonder of the world 

Whether Albert Einstein ever called compound growth the 8th wonder of the world or not, its benefits can’t be underestimated.

Effectively interest on interest, the effects of compounding grow over time.

Using a compound interest calculator you can see that if you invest £10,000 and receive interest at 3% over 10 years you’ll end up with £13,493. Simple interest, meanwhile, would see you earn £13,000. Compounding has added nearly £500 in value. 

If you start saving into your pension when your retirement is still decades away, the cumulative effect of receiving interest on interest can be huge.

4. Start early and you can afford to put aside a smaller percentage of your income 

The rule of thumb for pension saving is to take your age, half it, and contribute that percentage of your monthly income into a retirement plan.

It stands to reason, then, that the earlier you start saving, the less of your monthly income you’ll need to put aside.

At 30, you might contribute just 15%. Start saving into a pension at 50 though, and you’ll have much less time to build the pot you need. Consequently, you’ll need to put aside 25% of your monthly income.

This is only a rule of thumb, and while you should never be put off starting to save into a pension whatever your age, it does highlight the benefits of saving early. 

5. Pensions are incredibly tax-efficient, so make the most of them 

Pensions are an incredibly tax-efficient way to save. Not only do you receive tax relief on the contributions you make – effectively free money from the government – but pay into a workplace pension and you’ll receive employer top-ups too.

Basic-rate tax relief is paid automatically at 20%. As a higher- or additional-rate taxpayer you can claim back extra relief through your self-assessment tax return. 

Your employer, meanwhile, has to contribute 3% when you contribute 5% through auto-enrolment (for the 2022/23 tax year). You might even find that if you up your contribution, your employer will too.

The earlier you start paying into a pension the earlier you can start to take advantage of these tax efficiencies.

Get in touch

After a long career, you deserve your dream retirement but the best way to ensure you reach your goal is to start working toward it early. 

At The Pension Planner, we can help you understand what your dream retirement looks like and then put a plan in place to get you there. Whatever aspect of your long-term retirement plans you need help with, get in touch. Email info@thepensionplanner.co.uk or call 0800 0787 182. 

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

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