Making the most of a pension plan when you're young

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Kirsty Kerr

April 07, 2022

5 mins read

How you approach saving into your pension plan when you’re in your twenties and thirties can make a huge difference to how much you’ll have later on. We explain some pension basics – how it works, why it can be a good idea to make the most of it when you’re young and how to go about it.

When you’re in your twenties and early thirties, saving money will likely be about the near future – a holiday, a first home, putting something towards clearing that student debt or just making it to payday.

Pension savings aren’t something that many people tend to focus on until they hit their late thirties, forties or beyond. But taking the time to find out about the benefits of pension plans and doing a little bit of clever saving now is worth it – it could help set you up for a brighter future. 

How a workplace pension works

All employers are obligated to provide you with a workplace pension plan and you’ll be automatically enrolled in it if you’re aged 22 or over and earn more than £10,000 in a tax year. What this usually means is that some money is taken from your pay and invested into a workplace pension on your behalf, unless you choose to opt out. Your employer adds some money too. 

The money paid into your pension is then invested into funds, which gives your pension savings the chance to grow over time, although this isn’t guaranteed.

Then you can usually starting taking your pension savings from age 55, but this is due to rise to age 57 in 2028.

How much will I be saving?

In total, you and your employer need to pay in at least 8% of your qualifying earnings, and at least 3% of that will come from your employer.

Some employers will offer to pay in more than their mandatory 3% as a workplace benefit. Some will even offer to match your payments up to a certain percentage too – meaning they’ll pay in more if you do. It’s a valuable benefit so it’s worth checking to see if your employer offers this as it could effectively double the amount that goes into your plan.

What about the State Pension?

Your pension plan is not to be confused with your State Pension – which is something completely different. If you’re eligible for a State Pension you can currently claim it from age 66, although the State Pension age is due to increase to 68 between 2044 and 2046. 

It’s a guaranteed income, so it’s a welcome addition to your retirement income – but your State Pension isn’t likely to be enough to live on on its own. The full State Pension currently provides just over £9,600 a year – which is only enough to cover a very basic lifestyle and won’t support you if you want to retire earlier than the State Pension age. That’s why considering saving as much as you’re able into your pension plan as early as you can is an important part of preparing for your future.

Find out more about the State Pension and the changes that came into play in the 2022/23 tax year.

Are pensions worth it?

So you’ve been enrolled in a workplace pension plan and you’re paying in the minimum – what next? Why is it worth considering paying in as much as you’re able to?

Well, your pension plan is one of the most tax-efficient ways to save for your future. This is largely thanks to pension tax relief.

In a nutshell, pension tax relief means it could cost you less to save more into your pension. Tax relief is usually available for personal and third party payments to pension plans and the amount of tax relief you get largely depends on how your payments are being paid and the rate of income tax you pay. 

For most of the UK, this means basic-rate taxpayers (who pay 20% income tax) get tax relief at the same rate. If you’re a higher-rate taxpayer you get up to 40% tax relief, and additional-rate taxpayers get up to 45%. Don’t forget you may need to claim back anything over 20% from the government depending on how your payments are being paid.  

Some workplace pension schemes offer tax benefits in a different way (salary sacrifice or salary exchange schemes, for example). So do check with your employer how this works for you if you’re not sure.

Bear in mind that tax rules and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.

Why should I start a pension plan young and how much will I need?

People are generally living longer, which means the amount you save for retirement might need to last you longer than you think. Starting as early as you can gives you more time to potentially build up your pot and give you the lifestyle you’re looking for in retirement. And don’t forget that your pension plan is invested, so it has the opportunity to benefit not only from investment growth, but compounding as well  that’s the effect of growth on growth. 

Remember the value of investments can go down as well as up and you may get back less than was paid in.

The amount you’ll need will largely depend on the kind of lifestyle you’d like to have in retirement. Try our tool to see how much you might need to save for retirement to reach your goal.

How to save more

If you’re looking for the best way to pay more into your pension plan but you’re not sure where to start – here are some simple tips:

  1. Make sure you’re taking advantage of all the benefits your pension plan and your employer offers. If your employer offers a matching scheme, consider paying in the maximum amount your employer will match to get the most out of it. 
  2. Consider whether increasing your regular payments or paying in lump sums would allow you to pay more into your pension plan. You can read the pros and cons in – lump sum vs regular pension contributions: which is better?
  3. Getting a bonus this year? Deciding to pay some or all of your bonus into your pension plan could save you paying some big tax and national insurance deductions. Meaning you could keep more of it in the long run and it could be a great way to give your pension savings a boost.
  4. Even a small amount could make a big difference in the long term, especially if you’re starting young. If you’re able to, think about paying a little more into your pension when you get a pay rise or have a little extra savings. You can top up your Standard Life pension payments by logging in or registering for online services.

The information here is based on our understanding in April 2022 and shouldn’t be taken as financial advice.



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