PAY INTO A PENSION

Wrinkles and grey hair are inevitable as you get older, but a decent income in retirement is not. If you don’t save into a pension now, you may struggle to build up a big enough pot to live on.

‘The sooner you can commit money each month to a pension the better,’ says Claire Trott, a pensions expert at wealth management firm St James’s Place. ‘Delaying paying into a pension scheme can have a significant impact on the amount you will have at retirement and the contributions you need to pay later in life to meet your targets.’ This is because of the ‘snowball effect’ that compound interest, over a long period of time, can have on your savings and investments, says Dan Lane, senior analyst at Freetrade. He gives the example of two pension savers: Sam, who begins saving £100 a month at the age of 25, and Alex who begins saving £200 a month at the age of 45, doubling her contributions to make up for lost time. Both will have paid £48,000 into their pots by the time they are 65 – but even if they both earn the same 5% annual return on their investments, Sam will have £64,000 more in her pot than Alex.

THE GOOD NEWS

If you’re employed, your employer has to contribute a minimum of 3% into a scheme for you. If you’re self-employed or don’t work, you will have to set up your pension yourself. However, you can still benefit from income tax relief on your contributions. (It’s not wise to rely on the state pension alone.)

Many people nowadays invest into a self-invested personal pension (SIPP) online, which allows you to choose the funds you want to invest in – for example tech stocks, trackers or ethical funds. You don’t need to be earning to contribute to a SIPP, your partner could pay in. Again, if you think you will need help with this, consult an independent financial adviser. The Pensions Advisory Service has free advice on how to choose pension investment funds online.