It’s time to breathe. You’ve got your first job, the last three to seven years of your life are finally over and you’re now ready to step into the world of work.
Or if, like me, you didn’t go to university, you may have found your calling straight out of college or sixth form. The first steps into the world of employment can be daunting, but also represent a culmination of the hard work that you’ve put into your education over the best part of the last two decades.
Your mortar-board has barely hit the ground before you’re thrust into a world of HMRC tax references, PAYE, student loan repayments and the sudden realisation that the government pinches a sizable wedge of your salary before you even get to see it. Your head is filled with great plans of all the things you can spend your new hard-earned dosh on, be it clothes, cars or, eventually, a house or flat.
With all this excitement, thinking about a pension when you start your first job might seem unavoidably dull, and to many this is definitely the case (unless you’re a pension geek like me). These days, your company must enrol you in a pension. You can opt out but there are many, many reasons why putting your money into a pension is a great idea. Here are a few:
1. Free Money
When you join a workplace scheme, both you and your employer pay in. You should check the terms of your company scheme, but this is usually a matched contribution, for example if you pay in 5% of your salary, they pay in 5%. If you earn £25,000 a year for example, that would be a monthly employer contribution of around £104. Money that you wouldn’t get if you weren’t enrolled.
2. More Free Money
This time, from the government. Well, sort of. The government wants you to save into a pension to provide your income when you retire. As a result, pension contributions are tax-free up to a certain limit. If you’re in a workplace scheme, contributions receive tax relief at your marginal rate of income tax, so a basic rate tax payer will receive 20% tax relief, higher rate 40% and top rate 45%. If you pay into a personal pension from your bank account, the government will top up your contribution by 25%, essentially rebating the income tax you’ve paid on earning that cash.
3. The Eighth Wonder of the World: Compound returns
Well, that’s what Einstein (may have) called it. Pensions are a long-term investment by design. Put £100 away today, and at an interest rate of 3.5% it’ll be worth £103.50 in a year’s time. That might seem like peanuts, but put it away for 40 years and, at the same interest rate, it’ll be worth £395.93. You’ll have nearly quadrupled your money – that’s the magic of compounding.
And let’s look at monthly contributions. What, if in an addition to that £100, you put a further £100 in each month over that 40 year period? Well, you’d have a staggering £103,769.67, of which a huge £55,669.67 (more than half) is pure interest.
The bottom line here is to start early, when you start your first job. If you wait 10, or even five years to start saving, you’ll end up with less in the long-term, even if you save a larger amount.
4. Longer Term Investing = Less Risk.
The below graph sums this up well. The longer you invest money for, the less statistically likely you are to make a loss. It’s a fact of life that stock markets go down as well as up, it happens all the time, but a pension can help you ride out that stock market uncertainty.
It may be tempting to opt-out of pension contributions when you start your first job, to boost your monthly income, but consider the above points before making any decision.
And remember, if you change jobs, your pension won’t automatically follow you. You won’t lose it, but you might want to consider consolidating old pensions as you move through your career. It can save you money, because by investing more you can often get access to lower investment fees. Plus, it’s helpful to see all your retirement savings in one place.
HMRC offer a free tracing service for tracking down old pensions.
Work out what you need to save now for a comfortable retirement, with our pension calculator:
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As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Pension rules apply and tax rules may change in future. If you need help with pensions, seek independent financial advice.