Pension Planning at a Younger Age

More than half of younger workers aged between 25 and 34 plan to save more into a pension in 2013 compared with 26% of 45 to 54-year-olds according to a new survey by the National Association of Pension Funds.

I am really encouraged to see there is growing interest in pensions at all ages and particularly earlier in life. Pension reform has been a hot political topic over the last year, with the introduction of automatic enrolment eventually bringing up to 10 million people into workplace pensions, as well as the recent proposal for a flat-rate £145 per week state pension from 2017.

So, how can you make the dream of early retirement a reality? Can you afford it? Like it or not, once you have paid off your debts, the answer is likely to depend on what shape your pension is in, which offers valuable tax relief on contributions, tax-free growth and a tax-free lump sum at retirement. Saving £1,000 into your pension could cost you as little as £550.

It is often overlooked that you should start a pension as early as possible to give it as long as possible to grow. Starting a pension at age 30 rather than age 40 can result in a pension fund which is over 60% bigger at retirement. A rough rule of thumb for pension saving is to halve your age when you start saving and contribute this as a percentage of your earnings, so someone starting a pension at age 30 would aim to save 15% earnings.

By 2016, all workers should have access to a workplace pension. If you opt out you could be missing out on ‘free money’, so you should check what your employer offers before making any private arrangements.

Unless you are fortunate enough to have a pension based on your final salary, you should check where your pension is invested and review it regularly. There is an enormous difference between the best and worst pension fund in terms of performance as well as costs. If you are unsure about where to invest, you should seek professional advice.

If you can afford it, small regular increases in savings can result in a much larger pension at retirement. An increase in savings of 3% pa can result in a pension which is over 25% bigger over 20 years.

Many workers have several jobs over their career. It is important to keep track of old pensions and it may be appropriate to consolidate them for convenience. The Pension Tracing Service can help trace the details of a pension free of charge.

Finally, at retirement, it pays to shop around to maximise your pension income. Annuity rates can vary by over ten percent between providers, whilst medical and lifestyle factors can result in even higher pension annuities. In addition, pension drawdown can offer additional flexibility for larger pension funds.

[Matthew Clark, Western Morning News, 11 April 2013]

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