Pensions – there always seems to be a reason to put off addressing them. Many people in their early working life may likely consider that it’s too early to think about pensions, never mind wanting to lock their hard-earned money away for 20 or 30 years.
On the opposite side of the coin, those that have gone through their working life without paying too much attention to their potential retirement pot, but are now approaching the latter stages, may think it’s too late.
Here we look at the various stages of life and why pensions should always be considered.
Early working life
If you’ve been living as a student prior to starting work, you’re unlikely to want to surrender much of your pay packet and lock away the money for the future. Coupled with this, in the early stage of your career, it’s unlikely you will have as much earnings potential as you would like, and your income may feel low relative to your expenses. The good news about starting pension saving in your early working life is that you don’t need to put away a lot in relative terms. We would always advise to pay into a workplace pension as soon as you get the opportunity to do so. Even if you choose to opt-out for a year or two due to financial pressures, you should revisit this decision at least annually and re-enrol as soon as you are able.
Middle generation
The ‘sandwich generation’ is a real and growing reality for many people in their 40s and 50s. The fact that we’re all living longer means so many of us are left torn between looking after our own families and children, alongside having to take on caring responsibilities for elderly parents. Even in the absence of having to care for elderly relatives, there are often significant financial pressures to be faced during this time – including the cost of childcare, education, the family home etc.
Having said that, there will be periods when the financial pressure is reduced somewhat, and rather than diverting any extra disposable income into your account to be swallowed up by general day to day expenditure, putting funds into your pension may be a better, long-term option. If you are unsure about whether you want to lock money away for such a long period, you could instead save the money into a separate account, and nearer the end of the tax year (March), decide what proportion of the money you have amassed to put where.
Research shows that a significant proportion of people are unaware of how much their pension pot is worth at any given time. Whilst life may be full of many other things, ignoring your pension is likely to limit your choices in later life. Even if you feel unable to contribute more money into a pension, there may be ways you can make it work harder for you by taking the time to research your investment options.
Approaching retirement
Whilst paying into a pension from an early age allows for the benefit of compounding over the years, it’s never too late to think about pensions. There is no age limit on paying into a pension, and provided you are under age 75, you will still benefit from tax relief on personal contributions. However, once you start to access your pension funds – either as a lump sum or via a drawdown pension, you are likely to trigger the Money Purchase Annual Allowance, which will restrict the amount you can pay into a pension.
If your ability to pay into a pension has been reduced, there are ways you may be able to make the most of what you already have. Ensuring your pension funds are invested appropriately is one way to do this. If you need to draw upon your accumulated assets to support your income, looking at alternative sources, such as savings and investments, rather than automatically turning to your pension first could help to preserve the value of your pension for longer.