A large proportion of people in their 20s would likely, if asked, tell you that they’ve made no pension provisions whatsoever. Many people who fall into that category might give you different reasons – For example, many will cite the fact that they’re already financially strapped for cash in trying to meet rent or mortgage commitments and some will have already have started a family so that they’ll tell you that they simply haven’t got the available cash to put towards a pension as well, even if they appreciate it’s a good idea. Then there are those who adopt a ‘laissez faire’ or ‘live for today’ attitude to life and feel that their pensionable years are so far away that it’s more important to live now and spend the money on other things. However, the fact of the matter is that in failing to make any pension provisions in your 20s, you could be storing up a lot of financial problems for yourself later on. Yes, pensions aren’t as cool as buying the latest technology gizmo to someone in their 20s but in planning for your retirement when you’re this age, you’ll be so much better off financially when it comes to your retirement.
Consider Your Expectations
Let’s suppose you’re in your 20s and have a fairly decent income with a fair degree of disposable income to spend how you like. Chances are that if you’ve yet to think about a pension, you’re spending money on maintaining a particular standard of living and lifestyle. The problem is, if you leave pension planning too late, how on earth will you be able to live a similar lifestyle in your retirement? It’s no longer any good to think that the state will provide for your retirement and that’s why you’re paying National Insurance contributions out of your salary. This way of thinking is no longer justified. If you do some research now, you’ll see just how low the basic state pension is. It’s certainly not going to be enough on its own to help you fund any kind of aspirational lifestyle when you retire. Additionally, with an ever growing number of people reaching pensionable age and with no sign of that trend decreasing, the basic pension in say, 30 or 40 years time (if you’re in your 20s), is likely to be worth even less in real terms than it is now.
Other Alternatives to Pensions
Whilst a private pension set up in your 20s is definitely a good idea, don’t think that you’ll be tied up paying set contributions for the rest of your life or that there aren’t other options. Today’s pension schemes are far more flexible than they might have been years ago and many of them allow you to contribute when you can and pause contributions from time to time when you have other financial commitments. Then there are a whole raft of savings and investment schemes, including ISAs, stocks and shares and the property market which, just like a pension, can help you make the most of your money now for when you retire.
Things to Consider
One of the good things about a pension is that once the money is put in, it’s locked away until you retire. That way, it will be there when you’re likely to most need it – i.e. once you’ve stopped working. Unlike some savings plans whereby we’ve all put savings away with the best intentions only to find our desire to fund an impulse buy such as an exotic cruise or a new car suddenly means that our savings end up being depleted.
As a general rule of thumb, if you want to work out how much you should be putting away towards a pension each month, take your age and halve it and then that figure should be the percentage of your monthly salary which you should be looking to invest in a pension. For example, at aged 20, you should be looking at putting away 10% of your earnings in a pension scheme if you want to enjoy a relatively comfortable retirement. And, if you don’t start thinking about a pension until you’re aged 40, then for it to provide you with the same level of comfort in retirement, you’d need to be putting away 20% of your income. Obviously, not everybody will be in a financial position to consider their retirement years at a relatively young age but if you do fall into this category, the longer you leave planning for your retirement, the more you’re storing up financial headaches for your latter years by which time, it may be too late to do anything about it.