Why when you start paying into a pension plan matters

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Macaroni and cheese. Tea and biscuits. Pension plans and…time? That’s right, pension plans and time can go really well together. With this in mind, we explore why when you start paying into a plan matters. 

When should you start paying into a pension plan?

Typically, the earlier you begin paying into a plan, the better. If you start work in your early 20s, for example, it can be very worthwhile putting money into a plan from that point onwards, as we’ll explain in a moment.

But a pension plan can still help you save for your retirement even if you’ve started paying into it later. So if you’ve begun in your 30s or 40s, there could still be plenty of time for you to save for the future.

Why does when you pay in matter?

If you have a defined contribution pension plan – whether that’s a personal one you’ve set up yourself or a workplace one set up by an employer – you’ll pay into it. Your employer usually will too if it’s a workplace plan. The earlier you pay in, the more payments you (and potentially your employer) will have made by the time you retire. Remember, you can usually start to take your money from the age of 55 (rising to 57 from 6 April 2028).

You can get tax benefits on your payments into a plan, often in the form of tax relief. This basically means you can get a financial boost from the government – and it can start to add up over the years. You can find out more on MoneyHelper.

And money paid into a pension plan is invested. This means it has the opportunity to grow. You could even achieve growth on top of growth you’ve experienced, thanks to a process known as compounding. But it’s important to remember that the value of your investments can go down as well as up and you could get back less than was paid in. 

Let’s look at some examples

Hannah’s just started her first full-time job. She’s 22, and her employer has set up a pension plan for her. 

Hannah’s salary is £25,000. She pays 5% of her total pre-tax salary into her plan each month. And her employer pays in 3% of Hannah’s total earnings. 

When Hannah retires at 68, she could have a total of £197,000* in her pension pot.

But what if Hannah doesn’t start paying into a pension plan until she’s 30? In that case, she could have £142,000 in her pot at age 68. So she could have £55,000 less in retirement.

If Hannah doesn’t start paying in until she’s 40, she could have £88,500 in her pot at 68. She’d need to put 14.80% of her salary into her plan until she retires to end up with £197,000 in her pot at 68. 

It’s worth noting that we’ve assumed Hannah and her employer are paying in a percentage of her total salary. This won’t always be the case – for many workplace plans, you and your employer may pay in a percentage of a portion of your salary, known as your ‘qualifying earnings’. You can read about this, and the minimum you and your employer might have to pay in, on MoneyHelper.

If you’ve set up a pension plan yourself, your employer usually won’t pay in. But the principle is the same – the earlier you start paying into a plan, the more you could benefit.

Should you panic if you started paying in later?

As you can see from the examples, paying into a pension plan earlier can have a big impact on your pot size. Remember, though, many people work well into their 60s. So even if you’re just starting to save in your 40s, try not to panic; you could still have more than two decades to put money towards your future.

Let’s go back to Hannah. And let’s again imagine that she doesn’t start paying into her plan until she hits 30. This time, though, she puts 8% of her £25,000 salary into her plan instead of 5%. And her employer is willing to put in 6%. This means her plan could have a value of £248,000 when she retires. 

If she were to do the same but starting at 40, she could have £155,000 in her pot. 

The key takeaway is that the amount that’s paid into a pension plan is important – but so is the number of years the money is paid in for.

Don’t forget, you can claim your State Pension when you reach State Pension age (which is currently 66 but rising to 67 by 2028). If you get the full new State Pension, you can currently get around £10,600 per year from it. This alone may not be enough to live on, but coupled with a pension pot and any other forms of retirement income you have, it could make a big difference to your lifestyle.

How can I check if I’m on track for the life I want?

You could check out the Retirement Living Standards from the Pensions and Lifetime Savings Association. These can help you see how much annual income you might need depending on your lifestyle. 

You could then take a look at our pension calculator, which can help you understand how much money you might have in the future.

If you don’t think you’re on track, this could be an opportunity for you to decide what to do about your finances going forward.

If you’re a Standard Life customer and you’d like to check in on how your pension savings are doing, you can do this online or on our app. You can find out more about our online services on our website, or visit our support page for FAQs and ways to get in touch.

*Our calculations assume that Hannah achieves 5% a year investment growth on her pension savings, that her salary grows by 3.5% per year and that that she pays an investment charge of 1% per year. The figures are in today’s prices and have been reduced to show the impact of inflation at an assumed rate of 2%.  

The information here is based on our understanding August 2023 and shouldn’t be taken as financial advice.

A pension is an investment and its value can go down as well as up and may be worth less than was paid in.

Standard Life accepts no responsibility for information on external websites. These are provided for general information.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.