Young adults and pensions: Five reasons to engage early


Auto-enrolment in a Workplace Pension for the majority of UK employees has sought to engage more people on the topic of pensions. However, research from State Street has indicated that while more young workers are aware of pensions, they’re pessimistic about their retirement prospects.

Luckily, engaging early and taking an interest in investing for the future can put you in a better position. Even though retirement age may still seem far away, taking steps to build a pension now means your retirement years are far more likely to live up to optimistic expectations.

Even if you’ve left your 20s behind, you may have children or even grandchildren who are young. So, why not take this opportunity to have a chat about pensions with them? It could improve their financial resiliency in the long run. We’ve got five reasons engaging with pensions early is a positive step.

1. Take the chance to maximise your Workplace Pension

The chances are that you already have a Workplace Pension. Every employee that is over 22 and under the State Pension age, earns at least £10,000 per year, and works in the UK should now be automatically enrolled in their Workplace Pension scheme.

Money will automatically be deducted from your payslip and added to your retirement savings. At the moment, your minimum contribution is 3% of your salary with your employer adding a further 2%. From April 2019 this will rise to 5% and 3% respectively. The combination of tax relief and employer contributions means you’re effectively getting ‘free money’ so take the chance to maximise this.

It goes without saying that the longer you pay into your Workplace Pension, the better your prospects when you come to retirement age. You have a great opportunity to go above the minimum required too. You can opt to increase your contributions (some employers may even raise their contributions in line with yours too) and make lump sum deposits as well to build a retirement fund that matches your goals.

2. Have longer to build financial resilience

Life doesn’t always go as planned and there are likely to be a few bumps along the way. But preparing financially with the long-term in mind means you’ll be able to better weather obstacles that come your way.

The earlier you start thinking about your long-term financial health, the more time you’ll have to build up a fund that you can fall back on. So, for example, if the State Pension age unexpectedly rises beyond when you’d like to work, you may find you have enough to give up work early. Likewise, if the cost of living increases, you can improve your chances of still living comfortably and indulge in luxuries from time to time without having to cut back significantly.

With the research showing that less than one in ten young workers feel financially prepared for retirement, starting to build up financial resilience now can give you more confidence.

3. Align your retirement plans with other life goals in mind

When you’re planning your finances, retirement might be way in the back of your mind, with other life plans taking priority.

If you’re saving to buying a home, are planning on starting a family, or considering travelling before you settle down, retirement might not even be on your agenda. But it is something you should be thinking about in the context of your other goals.

If your focus is always on other goals without being conscious of the savings you need in later life, you could find your turn 50 with nothing in your pension at all, causing panic. Imagine having saved throughout out your early years to secure your dream home and then worked tirelessly to pay the mortgage off, only for you to have to sell it to fund retirement.

When it comes to financial planning balancing between the now and the future is important. With the right plan in place, you’ll be in a better position to enjoy each stage of your life.

4. Provide a better future for family

For many people in retirement age, providing support to family brings enjoyment. Planning your retirement finances ahead means you’ll also be in a better position to offer financial support too.

Research from Legal & General found that the Bank of Mum and Dad helped a quarter of homeowners get a foot on the property ladder, with this figure rising to 62% for those under 35. Monetary support from family is sometimes the only way for young adults to get a foot on the housing ladder, and the report found it’s becoming increasingly important for rental payments too. In 2017, parents are thought to have funded over £2.3 billion in rental payments.

With a pension that provides you with disposable income after you’ve covered the essentials, you may find you’ll be in a position to help your children or grandchildren move forward with their own lives. Pension freedoms mean you could even provide money in a lump sum to help your family create a better future.

5. Get the most out of tax-efficient savings

The way you save has an impact. You might be putting cash to one-side but are you getting the most out of it?

As the government is seeking to encourage people to plan for their retirement, you’ll often find that saving for your pension is one of the most efficient ways to build up wealth. Your Workplace Pension, for example, will add employer contributions and a 20% tax relief to the money you’re putting in, giving you more for every penny you save.

Another example is the Lifetime ISA (LISA), which can be used to fund both retirement and buying your first home. This tax-free wrapper allows you to save up to £4,000 each year and receive a 25% government bonus allowing you to build up your savings quickly.

Tax relief figures might seem relatively small, but they add up to significant amounts when you’re saving for the long-term; it can have a big impact on your retirement savings as a result.

It’s never too early to take an interest in your finances, especially those which will support you into old age. So, why not get advice about the things you can put into practice now to make life easier down the line? For more information get in touch.

Please note

A pension is a long-term investment. 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 performance. Your pension income could also be affected the interest rates at the time you take your benefits.

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