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The quarter-life pensions MOT

Ed Monk

Ed Monk - Fidelity Personal Investing

Young people have no shortage of reminders of how hard their financial lives will be.

The quarter-life pensions MOT

The high cost of buying a first home is often compounded by the need to repay debts built to secure university qualifications. Then comes the nagging awareness that you’ll need to find more to put away for retirement - whenever that eventually comes.

It can be several years into your career - and a promotion or two - before it feels like these pressures are lifting. Raising children might be the next milestone, but before that it can be possible to eke out some breathing space and bank some hard earned cash for the future. But it’s crucial to act while you can.

Those who are, say, 10 years into a career might be making good progress in their earnings, but it’s important to make sure your pension saving is keeping pace too.

Many of those who started their career in the past decade have benefited from auto-enrolment - that’s the scheme that automatically signs you up for a company pension, with both you and your employer paying in. The level of contributions required under auto-enrolment have risen steadily and now sit at a total 8% of qualifying earnings. In 2019/20, that means anything you earn between £6,136 and £50,000. You pay 5% and your employer pays 3%.

There is talk that this level may rise in the future but those hoping for a comfortable retirement shouldn’t wait for that. Increasing you own contributions in a gradual way means you can achieve your goals without big, sudden hits to your take-home pay.

The quarter-life MOT

New analysis from Fidelity shows what a difference small increases in contributions could make. A one-off MOT to your pension saving now will bring surprising rewards in the future.

We based our work on someone who is contributing to a pension via auto-enrolment, using the current contribution levels.

For someone aged 35 and earning £35,000, auto-enrolment means they are on course to build a pension pot of £434,638 by the time they hit their scheduled retirement age at 68. This assumes they have been saving into a pension since age 25 with the wages rising by 3.57% a year, with pension investments rising by 5% a year after costs. The modelling assumes the qualifying band for auto-enrolment also rises with inflation, assumed to be 2% a year.

Were they to increase this by just 1% of their total salary (as opposed to just their earnings within the qualifying band) they would add another £45,419 to their pension pot - taking it to £480,057 by age 68.

And the cost to do this? It would require less than £7 extra a week to be paid into your pension - and the real cost to you is likely to be less because pension contributions benefit from tax relief.

To make the impact feel even less, you could time your higher pension contributions with an annual pay rise. So, if you get a 4% pay rise one year keep 3% of that and pay an extra 1% into your pension. That way, you’ll still see your monthly pay packet rising and the pain of saving more will be hidden.

More on pensions

Important information

The value of investments can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.