How soon should you start thinking about your pension?

Are you wondering when to start paying into a pension? Well, the short answer is as soon as possible! Many people assume that a pension is something you only need to consider as you get older or have more disposable income, but that’s when you’ll actually need your pension. So, the savings part has to come first – and much earlier.

The earlier you save into a pension, the more valuable your fund will become – not just because of your savings but also thanks to compound interest. Here’s how it works:

Let’s say you plan to retire at 65, and your pension pot grows at an average annual rate of 5%. If you put £5,000 into that pot when you’re 20 and do nothing other than let the interest accumulate, you will have £44,925 by retirement age. If you wait until you’re 40 to invest that same £5,000, it would only have grown to £16,931 by age 65.

You can start paying into a pension from 18, and even small amounts are worth contributing, even at this young age.

How do you start paying into a pension?

If you’re working, your best option is to pay into your workplace scheme as, depending on your age, hours and earnings, you may also get contributions from your employer, boosting the value of your pension even further. All employers are required, by law, to provide a pension scheme, but not everyone qualifies for automatic enrollment. You can request to be part of the workplace pension even if you don’t qualify – find out more here about company pensions versus personal pensions.

Can you set up your own pension?

Yes, of course. If you’re not working or are self-employed, you can set up a personal pension to start making contributions and still claim some tax relief. The easiest way to do this if you aren’t contributing large amounts initially, and want something straightforward, is through a stakeholder pension. These are simple to use and a good starting point for young investors.

If you want more control over your investments or access to a broader range of options, then a self-invested personal pension, known as a SIPP, could be a better option. A lot of pension providers offer low cost, accessible SIPPs, often via an app. You can read more about how stakeholder pensions compare to SIPPs in our guide.

Can you start a pension for a child?

If you really want to see the benefits of compound interest in action, you could consider a Junior SIPP for a child. Parents usually have to set them up, but then family friends and relatives can make contributions and claim tax relief up to the annual limits.

If you’d prefer more flexibility to access funds before retirement, there’s options available there too. For example, remember that £5,000 investment we talked about earlier? If you put that into a Junior ISA when a child is born and assume the same average growth of 5% annually, it will be worth an impressive £119,199 by the time they hit 65.

Disclaimer – all calculations are for illustration only and do not factor in charges. Investments can go down as well as up.