Why it’s important to talk to your children about their pension contributions


Hand putting a coin in a piggy bankIf you want to have a comfortable and sustainable retirement, it’s important to build enough pension wealth to support your desired lifestyle. But while you may know this, your adult children may not.

According to a recent study, published in FTAdviser, while many young people save a significant portion of their salary, putting money aside for their pension is one of their lowest priorities. Instead, many of them focus on saving up to buy a house.

While this may be understandable, as buying your first home is a major life milestone, neglecting to put aside enough for retirement can be risky. If you want to know how to speak to your adult children about the value of pension contributions, read on.

Pension wealth is essential for financial stability in retirement

Retirement is traditionally seen as a time to relax and enjoy the rewards of your lifetime of hard work. As such, you will probably expect to enjoy a comfortable standard of living at this time.

According to consumer comparison site Which?, the average comfortably retired couple spends around £26,000 each year. This is a sizeable sum, and if you plan to retire before the State Pension Age, you may need a significant amount in your private pensions.

Thanks to advancements in science and medicine, people are now living for longer than ever before. According to government figures, the average man now lives to around 79 while the average woman lives to 83.

This means that, if you retired as soon as you were able, your pension wealth may have to last you for two decades or more. This is why it’s important to communicate the value of pension contributions to your loved ones if you want to ensure they can enjoy a comfortable retirement of their own.

Your children can benefit from employer’s contributions to their workplace pension

When it comes to putting money aside for a pension, there are two valuable ways that your children can increase their contributions. If you want to encourage them to do so, you should explain what they are and how they work.

The first one is the value of employer contributions. If your children have a job, they’re probably paying into a workplace pension. This is thanks to the government’s implementation of auto-enrolment, which was first rolled out in 2012.

This aim of this policy was to encourage more Brits to save for retirement by helping them to do so without having to go through the stress of setting up a pension themselves. Instead, their employer automatically deducts some of their wages and contributes it to a fund, as well as adding in some themselves.

The minimum total contribution to a workplace pension is 8% of your child’s salary, of which their employer must provide at least 3%.

The benefit of the employer contribution is that it’s effectively free money, which can be a valuable way to increase the size of your child’s pension pot.

Of course, 8% is only the minimum contribution, so if your child wants to increase the amount they put aside for retirement, they’re perfectly able to.

One useful lesson to teach them is that many employers will increase their own contributions when their employees do, which can be a great way of boosting pension wealth. However, not all employers offer this benefit, so let your children know that it’s important to check beforehand.

Tax relief can be an easy way to boost pension contributions

Another benefit that you should teach your children about is the importance of tax relief.

To incentivise people to put money aside for their pensions, whenever your child makes a contribution, the government tops it up. Some of the money that they would have paid in tax is instead added to the pension pot.

As you may have read in our previous article, the level of tax relief that your child could receive is dependent on the amount of Income Tax they pay:

  • If they are a basic-rate taxpayer, they’ll receive 20% tax relief
  • If they are a higher-rate taxpayer, they’ll receive 40% tax relief
  • If they are an additional-rate taxpayer, they’ll receive 45% tax relief.

For example, if your child pays the basic rate of tax, it will only cost them £80 to make a £100 contribution to their pension, as the government would add an extra £20 in relief.

The earlier they start, the more they can benefit from compound returns

The final lesson to teach them is about the benefits of compound returns on their contributions. To put it simply, this is when you receive returns on previous growth and while it may start small, it can quickly add up to a significant amount over time.

Young people are especially able to benefit from this as they have a much longer time frame in which to contribute. If they start early, they can reap the benefits more effectively than if they started later.

This is why contributing to your pension can be so valuable while you are young. Not only are they essentially getting free bonus money from tax relief and their employer when they contribute to their pension, but they’re also earning compound returns on that free money for a longer period.

Get in touch

If you want to know more about how to plan for a sustainable retirement, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.