You’ve got your first job! You’re on the career ladder! Yes, you’ve joined the world of the grown-ups – and some unfathomable, deeply mysterious words associated with OLD people have crept into your conversations. Workplace pension schemes!
Perhaps your parents have asked the question, “Have you thought about a workplace pension?” Or you’ve heard an older colleague moan that her pension is never going to be enough. Worse, you’ve received a letter from your employer saying they’ve enrolled you in the company pension scheme and money is going to be deducted from your salary. What should you do? Why should you even care?
It’s the law
The government wants to make sure that people plan for their retirement and so your employer must give you the option to join a pension scheme. When you think that for most people in their 20s retirement is an eternity away, you can see why forcing people to pay attention was necessary. You can opt out, but at least you would have been told.
What’s the deal?
Pensions are about saving for the future and if the fear of a poverty-stricken old age isn’t enough of an incentive, then there is some free money an offer. Your ‘pension pot’ (the amount being saved towards your pension) is made up of your contributions, plus tax relief from the government plus an amount from your employer – 2% (going up to 3% in 2019) of your annual salary. Not sure how that works out for you? Well, let me throw in some figures. Say, you’re a PR Assistant working for a high street brand, earning £24,000 and paying £80 a month into your workplace pension scheme. Your tax relief will mean an extra £20 added to your contribution and another £40 from your company. So, £60 ‘free’ money each month.
What’s that? I hear you ask. You can choose to stop working at 55 (it can be later) and start taking an income from your pension pot. By then, your PR Assistant pension contributions would have grown to deliver a yearly income of around £16,080. You could immediately take out a lump sum (thousands of pounds, which you could use to pay off debts and/or treat yourself), the remaining amount would give you a monthly income.
Hardly enough for the Champagne lifestyle you’ve imagined?
It’s a Catch-22 situation. Once you’re forced to think about it, you know saving for the future is a wise thing to do. However, 50ish, 60ish is a long, long, long way away and you’ve got a student loan to pay off, bills and plans to buy a flat… I definitely see where you’re coming from. However, your pension pot will increase over the years. There is this thing called compound interest, whereby the money you save earns interest, which means it’s always increasing above what you actually pay in and continues to earn more interest. Don’t forget also, your salary will go up as will your workplace pension contributions. So, your £80 a month contribution as a PR Assistant isn’t static. It’s going to grow.
Shouldn’t the government help?
There is also a state pension age, which is determined by your birth date and gender. Currently, a woman born in 1956 can start drawing her state pension at 66 and expect to get around £8000 a year. This is based on her National Insurance contributions. As a millennial, though, you should have little or no expectations of getting a state pension. Our ever-increasing elderly population means there are fewer people paying National Insurance and the state pension pot is depleting. There is absolutely no guarantee that you’ll be entitled to a state pension in the future! Hence the government’s insistence that you start thinking about your retirement now.
Your greatest assets at the moment are youth and time. But they both have sell-by dates, so use them wisely. The advice is, start young, save as much as you can afford – and when you get to the top of that career ladder, you’ll have even more disposable income to draw your savings from! Finally, if you choose to opt out of your workplace pension scheme, don’t give up on saving. For example, think about a tax-free ISA (but that’s for another article).
Whatever you do, start saving now. Increase the amount you save in line with the increases in your salary and remember, compound interest is your friend.
Words by Pearl Singer
For more information:
GOVERNMENT PENSION INFO: https://www.gov.uk/workplace-pensions
COMPOUND INTEREST: https://pensionsorter.co.uk/compound-interest/
PENSION ADVICE FOR YOUNG PEOPLE: https://fixmypension.com/pension-advice-for-young-people-20-somethings/