If you are only just getting used to the idea of a steady income, it’s tempting to think that you can afford to wait before saving into a pension. After all, retirement could be more than 40 years in the future.
There are plenty of other things to spend your money on right now, even before you start thinking about building up a deposit to get onto the housing ladder before it gets out of reach entirely.
But there are some sobering facts to you need to be aware of about your pension, even while you are still in your 20s.
You could be worse off under the new state pension
The state pension has recently undergone a fundamental overhaul. In theory, it should be simpler and fairer with the old basic UK state pension and state second pension (SERPS) replaced by a new single-tier, or flat rate pension. The full new State Pension is currently set at £155.65 a week – but it is probably not enough for a comfortable retirement, and it might leave you worse off than the old system.
This is because the SERPS part of the old state pension was earnings-linked. Under the old two-tiered system, people were able to build up additional savings into the state pension pot through the second state pension previously known as SERPs. In addition, they would have been due to receive the full amount with just 30 years of contributions. Under the new rules they will need 35.
Under the new ruleThinktank Pensions Policy Institute has calculated that three quarters of those now in their 20s will be £19,000 worse off over the course of their retirement.
Older people are less likely to be affected by the shortfall. The government’s figures show that the majority of workers retiring before 2040 will be better off. It’s people who are just starting out who will lose out under the new rules.
What about the future?
Of course, £155 per week state pension may not sound a lot now, but it is sure to go up in years to come – isn’t it? The answer is yes, if only to keep pace with inflation – but the government is facing a financial timebomb with the state pension. As life expectancy increases the costs will grow even greater. The chances are by the time you retire, it will make up an even smaller percentage of the amount you would need to live one.
You need to start saving now
Automatic enrolment in private workplace pension schemes will help younger people who are new to the workforce. But the performance of most schemes is modest, partly due to the low level of contributions involved.
Most people will need to consider additional pension provision, and the costs can be sobering. With the children out of the way and the mortgage paid off, the chances are you would need less money in retirement than you to earn – now. But even with the state pension to depend on, you will need to have amassed a tidy sum to enjoy anything like the standard of living you enjoy now.
Most of us would not look forward to living on £10,000 a year. £30,000 a year might sound a more reasonable target. Some experts have suggested that to enjoy that kind of figure when they retire, 20 year olds should be putting away around £800 a month. For most people, that kind of figure is simply out of reach.
However, despite the number involved sounding frightening to start with, there are solutions which could help you retire in comfort, if you act now. The power of compound interest, and very real tax advantages of pension plans can make your pension fund the best investment you’ll ever make.
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