Starting that nest egg now is great forward planning for young people who are thinking ahead to retirement.
There are many reasons to delay thinking about retirement. For young people, the distance in time is the main reason. For some it could be 45 to 50 years away. With other considerations such as education, many young people are staying in education, going to university or taking on additional training. Alternatively, the pressures of saving a house deposit. And for others, lifestyle choices can all play a part. These are all valid reasons to sidestep from thinking about later in life. However, for those that are considering starting contributing towards a pension. The benefits of forward planning for young people are can be fantastic.
If you are a little older or no longer consider yourself to be a young person, you may wish to read Retirement Planning: 8 Step Checklist to a Simple Retirement.
Benefits of Forward Planning for Young People
- Even starting small makes a difference.
Small amounts of savings can add up very quickly. Especially if this small amount is contributed to for 45-50 years. Once these small amounts start to accumulate, it is easier to see the value of these smaller contributions which many find very encouraging. Even before looking at tax relief and interest added, smaller amounts which to some may seem lower in significance can make a huge difference in the future.
- Tax relief.
The earlier contributions are made to a pension scheme, the more opportunities there are to take advantage of the tax relief available. For example, for every 80p paid in to a pension, the government adds 20p. While this may only seem like a small amount, it can quickly add up. For every £1000 contributed to a pension, the government will top this up by £250. This example applies to basic rate tax payers. Higher and additional rate payers may be able to claim more, depending on individual circumstances and current tax rules.
- Retirement could start early.
Forward planning for young people could include early retirement. To make this possible, forward thinking is essential. Contributing more to a pension at a younger age could significantly impact the age at which an individual may choose to retire. Starting pension contributions later could delay a planned retirement date or impact then pension amount ideally received.
- Benefit from employer contributions for a longer period of time.
By contributing through an employers pension scheme, employers are obliged to contribute to the pension as well. Although Auto Enrolment starts at age 22, provided an individual earns £6,136 or more a year (tax year 2019-20), they have the right to opt in to the employers pension scheme at any age.
- Contribute less now for a higher output.
Often contributing less money overall in to pension from a younger age could be more beneficial than contributing more from a higher age. This takes in to consideration the tax reliefs that are available, missing out on employer contributions and any interest that may be accrued during this time.
Considerations of forward planning for young people.
By making the decision to start contributing towards a pension from a younger age there are considerations that should be thought about. The benefits are very defined. They demonstrate very clearly that the earlier pension contributions start; the increased likelihood of having more of a pension to utilise at retirement age. Thus, leading to more freedoms. But what considerations are there of forward planning for young people.
- What sort of lifestyle is wanted?
Thinking ahead to retirement, many young people imagine taking regular holidays, joining health clubs, taking time to volunteer or for some, the idea of supporting family with childcare. Whatever lifestyle is desired, there is often a cost to it.
- Will you own your own home?
Reducing financial commitments during retirement is a great way have a greater amount of disposable income available. Rent or mortgage payments for some are an essential financial commitment. Having the ability to own your own home and pay off a mortgage ahead of retirement can release a significant amount of expenditure a month. Although home ownership is not for everyone, young people should consider saving towards a home deposit, this could reduce the amount they are able to contribute to their pension. However may recognise the benefits if they have been able to pay off or pay down the mortgage ahead of retirement.
- Do you wish to retire early?
Not everyone will wish to or be able to retire earlier than the age they receive their state pension. However, for this to be an option to consider, forward planning for young people and having a good sized pension pot will make the answering this question a little easier.
When looking at the benefits and considerations, forward planning for young people and starting pension contributions early can be concluded to be the most sensible option and will offer greater freedoms and flexibilities.