WHY PENSIONS MATTER (whatever age you are)

it’s never too late to start saving for your future, and the earlier you start, the less painful it will be. ROSIE MURRAY-WEST looks at the options...

WE need to talk about pensions. It’s not always a pleasant thing to start thinking about how you’ll fund your retirement, especially if that time currently seems very far way. However, the younger you start thinking about starting to save for when you’re older, the easier it is to save enough to live on when you retire.

The coronavirus pandemic has made it harder for many people to save for the future. When life is uncertain it is particularly hard to prioritise the types of savings you cannot access until you are older. Figures from Royal London show that 40 per cent of people aged 18-34 stopped paying into their pensions over lockdown, with the most common reason being they couldn’t afford to.

Lorna Blyth, head of investment solutions at Royal London, says that eight out of ten of those who paused their contributions are planning to resume them at some time.

‘It is vital that people follow through with their intentions to resume contributions as soon as they are able if they are to avoid long-term damage to their retirement prospects,’ she says.

If you are wondering whether you should restart, or start, a pension, here’s why it’s so important that you do so.

Why do I need a pension?

When you retire, you need to have something to live on. It’s all very well assuming you’ll ‘work til you drop’ but most of us should be planning for a significant period of downtime after our working lives when we do not want to work and aren’t physically or mentally able to continue at the same pace.

At present, life expectancy at birth is 79.5 years for men and 83.1 years for women, but another measure – healthy life expectancy – shows that you can’t expect to be well for all of that time. The average man will be healthy for 63.4 years and the average woman for 64.1.

Your pension needs to replace the wage you had coming in once you stop working, and it needs to last for the rest of your life. Although most people will also receive the Government’s state pension, the full amount you can receive is only £175 per week, which is unlikely to be enough to fund most people’s living costs.

In the past, many people had so-called ‘final salary’ pension schemes as part of their jobs, which paid a guaranteed amount every month for their retirement. These are very expensive, and although some employers still provide them, they are far rarer. Most of us now have what are called ‘defined contribution’ pension schemes, where your money is invested and can rise or fall over time, and you receive the value of the investments as your pension pot.

So, how much do I need to save?

Figures bandied about for how big a pension you’ll need can be daunting, especially when you’re just starting out. The good news is, though, if you’re younger, you’ll need to save far less of your pay packet into a pension to get there, because there is time for your investments to grow and compound. Just as a snowball gets bigger when it is rolling up a hill, your investments grow and then that growth is added on – a process known as compounding.

The Government will help you, too. At present, the taxman adds back any tax you have paid on your income to your pension contributions up to a certain limit, whether you pay basic, higher or additional rate tax. This can help your pension pot grow faster.

Your employer also helps you to save for your pension. They must add a minimum of three per cent of your salary each month, and some will add more if you do, so it’s worth investigating this as a possibility.

Figures from Which? suggest that a couple will spend around £40,000 a year to have a comfortable retirement (this assumes you’ll have paid off a mortgage, for example, so you won’t be spending as much as when you are younger). To achieve this you’ll need a pension pot