Why ‘save early and often' is the way to go in 2018
THIS is the first day of the New Year, so we have all 365 days of 2018 stretching out before us . . .
It's a time for resolutions, a time for changes to make our lives better – whether it be to get more exercise, leave the indulgence of the festive season behind us, or start on a new job or new project. And who knows – this year some of our resolutions might even last longer than a week!
Well, why not let 2018 also be the year when you do something to sort out your financial security in the future?
The good news on this front is that the government is planning to extend its campaign of ‘auto-enrolment' in a pension to even younger workers than before.
At the moment, you are automatically enrolled into a workplace pension if you are at least 22 and earning at least £10,000 per year.
Well, by the mid-2020s, this will be extended to younger workers aged 18 or over, which should bring a further 900,000 into the scheme. Good news for our children who are currently 11 years old, and will turn 18 in 2025!
Auto-enrolment for the over-22s was launched in 2012, and so far 9m people are saving into a pension in the UK, as a result. This has been a massive boost for the whole pensions landscape, but it may not be enough: a review by the Department for Work and Pensions says that 12 million people, or 38 per cent of the working population, are still not saving enough for retirement.
This is why many experts would advise setting up a personal pension, quite separate from any workplace pension, as an additional strand of retirement planning.
As ever with pensions saving, the motto is: the earlier the better.
In the business there's an old saying that ‘it's the first pound you save that works hardest for you'. This is because it is invested for a longer time, and has more time to grow. It has been worked out that £1 saved into a pension at age 21 can, by the time you reach 65, have grown to £28.
The other side of the coin is that by delaying starting a personal pension you can miss out on much of that growth, which can make a huge difference to your outcome when you retire.
Here's why: the financial services company Hargreaves Lansdown have done some fascinating number-crunching to show the benefits of starting to save for your pension as soon as you go to work – and what you sacrifice if you ‘faff around' for a few years, and put it off.
This scenario works on two assumptions: first, that you save a constant £125 per month, and second, that your pension will grow at 4 per cent per year.
If you're a wise ‘early bird' and start saving at age 20, and work until age 65, you will pay in a total of £54,000, which with long-term growth will grow into a pension pot of £183,000.
If you start saving at age 30, you'll save £42,000, which will grow to £112,000.
If you don't start saving until 40, you will pay in £30,000 which with compound interest grows to £63,000.
If you are a real late starter and don't start saving until 50, over the following 15 years you will pay in £18,000, which will grow to a pension pot of £31,000.
As you can see, putting off starting a personal pension by 10 years could reduce your final outcome by nearly half.
So the trick is not to ‘faff around' this year! To adapt a saying that pops up at election times in these parts: ‘Save early and often' is the way to go, if you want a comfortable lifestyle when you retire!
::Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005 . Further information on our Facebook page “Kennedy Independent Financial Advice Ltd”