I am 25, what do I need to think about when it comes to pensions?
Pensions are confusing. They are even more confusing when getting any money from them seems decades away. When you think you’ll be so old and grey, life won’t be much fun anyway. So, if you are 25 now, what do you really need to know about pensions to get off to a good start.
First, every employer has to offer you a pension scheme these days. Nearly all pension schemes for younger people build up what are essentially pots of money. One day, far into the future, you get to take this pot how you wish. This isn’t that complex, you put some money in, so does your employer and it builds up over time.
The minimum your firm must put in is 3% of your salary. But, it only has to do this as long as you put in at least 5%. If you don’t pay in, they don’t have to.
Many employers provide this minimum but some are more generous. They may, for example, put in say 8% if you also put in 8%.
Should I join the scheme and pay the minimum needed?
In short, yes. Here’s why.
If you don’t, you are giving up free money and also saving your employer money.
Many people struggle meeting costs each month, especially when they are younger. So there is a temptation to cut as much cost as possible. Once you have joined, pension contributions may seem an ideal place to save costs.
Stop right there! Paying into your workplace pension should be the very, very last thing you cut back on.
Let’s look at an example and keep the numbers simple. If you earn £24,000 a year that’s £2,000 a month.
You contribute £100 per month to your pension – 5% of your pay. But the Government doesn’t tax you on the contribution to your pension which, at 20% tax, is a saving of £20 per month. So it’s like you contribute £80 and the Government also puts in £20.
Now, your employer must also pay in, even if it’s just the minimum. In this case they must pay in 3%. This is another £60 per month going in.
So, all in all, for a £80 payment, you are getting £160 in total going into your pension pot. Not bad!!
Should I pay in more then?
If your employer will pay more in if you do, then yes it’s a great way to save. Much better than anything else, as you are getting the tax rebate and the employer’s extra contribution.
But, put simply, there may be more important things you need right now or want to save for. You may want any further savings to go towards buying a house, rather than a pension. In this case a Lifetime ISA may be a great way to save any other extra money you have, as the Government makes a payment to these also.
What else do I need to know about contributions?
Not too much, but if you get offered salary sacrifice by your employer as a way of paying pensions, you should look at this.
This means instead of paying your full salary and you paying your contribution into your pension, your employer pays your contribution directly. They then reduce your salary by the amount they pay.
It’s like you never earned the money at all, which is great, as you save some National Insurance contributions also. Always check out if salary sacrifice is available.
Once you pay in your contributions, where do you invest them? Most pensions have simple, low cost, default investment funds designed by experts. These are a good choice for most people, unless you have the skills needed to select various investments yourself. Most people don’t.
If you are ever offered a different type of pension, called a defined benefit pension, only usually available in public sector jobs, you should definitely pay the contributions needed to join this, no matter what.
These pensions are very valuable and your employer needs to pay a lot of money into them to provide these if you join. Never give up the opportunity to join one if you are lucky enough to be offered the chance.
Finally, many working people are entitled to benefits whilst working, particularly Universal Credit.
Check to see if you are. If so, this added income may help you to save more, or at least meet the minimum payments needed to receive your employer’s contributions if you are struggling to pay these.
What about pension planning – what should I think about?
In short, very little.
At 25 you only really need to know one number. That number is – what age may I be able to retire with a feasible retirement income?
So much will change anyway between now and retirement age, worrying about the detail at this stage isn’t really worth it. Just set up a plan and check from time to time if you are broadly on the right track. When you are older you can start to refine this plan to make it more accurate.
To use Guiide to see if you can retire at reasonable age just follow these steps….
- Go to Guiide and start the journey
- Say you wish to retire at say 65 in the You page
- Enter that you do not want tax free cash. Choose you want a minimum retirement income increasing at 2.5% in the Wants page
- In the Haves page enter all your current pension pot values and the contributions you and your employer are currently paying in total. So in the above example this would be £160 a month
- Then just see in the Design page if you have any shortfalls
- If you do, adjust the retirement age higher in the You page until the shortfalls are gone
- Once you have no shortfalls, just register to save your details
- After registering you can check the Benefits page in our Dashboard and see if you may be eligible for any which may help with pension saving.
- Once a year come back to our Dashboard page, update your pots and contributions to see if you are still on track
- This should be all you need to do until you reach about 40. You can think about it a bit more after that.
At 25 you have many better things to worry about than pensions. Just doing the simple things above is all you need at that age to get off to a good start.
