The popular school of thought has always been that the earlier you start paying into a pension, the better, as even a small amount of money will have a long time to grow. However, this view is being challenged by a group of leading pension experts, who believe the reality isn’t quite so straightforward.
Unless you’re lucky enough to have a job that offers a ‘defined benefit’ pension, which guarantees a certain level of income based on salary, then at some point you will have to think seriously about your pension. The good news for many: the experts believe 35 is the best age to start saving.
The study found that perhaps predictably, people’s incomes tend to be at their lowest at the start of their careers, and at this point, they are better off consuming their incomes rather than using them to save. It is better spending the money on having a reasonable quality of life rather than stretching your finances to breaking point by saving for the future.
Of course, waiting until the age of 35 to start saving for retirement is not without its drawbacks, as it means you’ll have to steadily increase your contribution levels as you get older. By the age of 55 you’ll need to be saving around a third of your salary. However, as you should be earning more at this point and have already made life’s major purchases, this should not compromise your standard of living.
Although the above must sound incredibly inviting to those in their 20s who are yet to start paying into their pensions, this theory does make a great many assumptions about people’s lives. We may well earn more in our 50s, but as we earn more our lifestyles tend to expand to reflect this. Also, no allowance is made for a change of job, a career break, illness, redundancy or divorce.
Building your pension pot
Irrespective of the worth we put on such studies, they do serve a purpose, which is getting people thinking about their pensions. In general, whether you contribute to a pension at a young age is a decision which should be based on your financial position. If an employer is offering a scheme whereby they match any contributions you make, then if you intend on staying in the job for a good length of time, you should join the scheme as otherwise you’ll be effectively turning down extra pay.
However, if you have existing debts, paying these off should be your first priority, as short term debts such as personal loans and credit cards accrue interest and charges which can quickly get out of hand.
It is also wise to have savings which amount to between three and six months worth of income. This fund gives you something to fall back on should you lose your job or be unable to work for some other reason.
When both of these considerations have been accounted for, you can then start thinking seriously about your pension. With the tax advantages pensions carry, they do represent a good investment, you cannot access your money until later life, which is an excellent method of ensuring your pension remains untouched until you really need it.
To discuss your pension with our experienced and helpful team, call 1890 917 917 today.