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Early careers – retirement saving in your 20s

Thanks to automatic pension enrolment, more of us are investors than we might realise.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

You’ve just started your first proper job. Congratulations.

Given its early days, the holiday period’s probably going to be full of questions about the job and the colleagues. Safe to say no one’s going to ask about your retirement plans.

We’re not suggesting it’s time to start flicking through retirement brochures. But we do think you’ve got nothing to lose by putting some money aside for your life after work. After all, if one thing’s certain, it’s that you’re going to need some savings.

Here are our top tips for pensions and saving for life later on. It’s much easier than lots of us think and the good news is, if you’re 22 or over, you’ve probably already started.

Pensions - did you know?

There are a few ways you can get an income when you retire. Here are the two main ones:

From your workplace pensions

  • After you start your job, and you’re between 22 and the state pension age earning over £833 a month, your employer has to enrol you into a pension scheme
  • At the moment the total amount contributed to your pension is usually based on at least 8% of your total earnings. That’s 8% of your salary, plus any bonuses, overtime and a few other things. It counts for earnings between £6,136 and £50,000
  • The 8% is usually made up of 3% paid by your employer, 4% paid by you and 1% paid by the government
  • Some employers pay more than 3%, and often if you’re willing to pay more they will too, so it’s worth checking

From the Government

  • When you reach a certain age, the government pays you an income in the form of a state pension. At the moment it works out as £168.60 per week or £8,767.20 a year.
  • If you’re currently in your twenties you’ll be entitled to get a full state pension when you reach 68 if you have worked enough, or had National Insurance credits, for 35 years.
  • The tricky thing is, it’s a big expense for the government – it currently costs the government around £97bn a year.
  • That’s meant the age at which you are allowed to receive your state pension keeps getting pushed back.

Tip 1 - Start now

There isn’t much more to it. The earlier you start, the longer you have for your investments to grow.

Let’s say you start investing into your workplace pension scheme at 22 on a salary of £28,600. £150 goes in each month and what you invest in grows by 5% a year after charges. By the time you reach retirement at say 65 your pension pot could be worth over £250,000. The longer you put off starting, the smaller your pot will be or the more money you’ll have to pay in yourself.

Pension Pot vs Starting Age

Scroll across to see the full chart.

A pension pot of just over £250,000 isn’t bad. Especially since it only cost you £75 a month. That’s assuming you paid 4% of your salary whilst your employer and the government made up the other 4%.

The good news is you can pay in more than 4%, and doing so can make a real difference. Using the same example as above, here’s a look at the impact of increasing your monthly contributions and assume your employer will match them. You can usually change the amount you pay in quite regularly, so you could make the increases every few years.

Total monthly contribution What you pay Pension pot
£150 £75 £264,307
£200 £100 £352,409
£250 £125 £440,512
£300 £150 £528,614

This graph and table are illustrations and do not take into account inflation or the volatility of the stock market. The value of your pension will depend on the performance of your investments and your retirement age. It’s usually a good idea to pay off any short-term debts before increasing what you pay in.

Questions for you:

What do you know about your workplace pension – do you know how much you and your employer contribute?

Do you know if your employer will increase their contributions if you do?

Tip 2 - Be adventurous

When you join a company pension scheme, your money will end up in a default investment scheme. This needs to be a one size fits all investment, so it’s usually made up of both shares in companies, or you might see the words ‘equities’, and bonds.

Bonds are a bit like ‘IOUs’ to companies and the government – you get interest for lending them money. They’re generally considered safer, but won’t grow your money as fast.

By increasing the proportion of our money we give to equities, we have the potential to grow our money at a faster rate. Over the long term it can really pay off. There’s no such thing as a free lunch though, and it does come with a higher risk of you getting back less than what you put in.

When we’re younger we’ve got a long time before we actually need to use that money, and in a pension we can’t access it for a while anyway – if you’re in your 20s you’ll be waiting until you’re at least 57. That means we can usually afford to be more adventurous by having a higher proportion of money in shares in the early days provided you can accept a higher level of risk. Your employer’s pension provider might offer other investment options.

Questions for you:

What is your workplace pension invested in?

What percentage is invested in equities and what percentage is bonds?

Aside from the default, are there other investment options?

Tip 3 - Let it be

Once you’re happy with your contributions, there’s not much more to do than sit back and let your investments get to work. Just check in every so often to make sure your investments are still right for you.

The key thing is staying invested. The news will always bring reasons to sell, Brexit, the financial crisis and trade wars, you name it. But the fact is, if you’d stayed invested in the UK market, from the peak before the financial crisis, to now, you’d still have made money. Although this isn’t a guide to the future. The value of our investments will always fluctuate as investors react to new information. But most companies will continue to navigate uncertainty and find ways to make money. As investors we should aim to do the same.

It’s expected we’re each going to have around nine different jobs over our working lives. If we change companies each time, that’s nine different pensions. Quite a lot to keep track of. It’s up to you what you do, but we think it can be a good idea to take your pension with you when you move jobs.

You can transfer your old pension to your new workplace plan, or keep all the old ones under a separate “forever pension” that becomes your home for the pension plans you accumulate on the way. HL is somewhere you can do that, you can learn more about transferring old pensions on the Pensions section of our website.

Before transferring your pension please check you won’t lose valuable guarantees or need to pay high exit fees.

Questions for you:

How many pensions do you have?

Do you know where they are and how they’re performing?

Learn more about investing

Our new section has our top tips on what makes a good investor.

Find out more

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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