Should You Be Saving For A Pension In Your 20s?

Retirement. A trip on the Orient Express, a fancy cruise, or – depending on what you're into when you're 70 – weekday afternoons spent getting your hands dirty down the allotment. At least, that’s what retirement was. Now it's looking like work, work, and more work may well be our future – especially since the national age of retirement is to be increased to 66 in 2020.

Numerous reports and studies suggest that, from interviews with millennials, many of us don’t expect to retire until we're well into our 70s or 80s. An even more worrying study by Scottish Widows found that, although millennials naively think quality of life in retirement will be awesome, 28% of us have zero plans for funding it.

So what can we take from this? Probably that nobody has a clue what they’re doing about their pensions, especially considering the concerns that the pot of money the government uses to fund state pensions could run out 20 years earlier than was predicted. According to an independent report conducted by the Centre for Policy Studies, this is happening because pensions are paid for by NI contributions and the pot of money is shrinking as the population ages because fewer people pay in and more people take out

Put bluntly, if you don’t have a job with a decent pension scheme, or some kind of money-spinning property portfolio by now, chances are you'll be feeling screwed by your retirement. And to make matters worse, articles about young people’s retirement plans are either critical (see the Financial Times piece that said millennials would rather spend their pension on a holiday), or answer questions for those whose circumstances are so unbelievably unattainable for most people, it feels insulting. “I have £100,000 nest egg. How should I invest?” said no 22-year-old ever.

Even the Bank of England recommends buying property rather than investing in a pension fund. According to The Telegraph, this is because bank rates available for savers have drastically fallen in recent years, meaning more people are becoming buy-to-let investors. But when deposits of £60k are needed to buy a one bedroom flat in London, this is simply not an option for many.

Kat*, 26, from Brighton describes herself as "financially sensible", but she doesn’t earn enough to have two savings pots. “I work for a local lawyer and I have no pension. I earn £24,000 a year which, after £800 a month comes out for rent, means I can afford to put £200 aside to save. I want to buy a house, which means saving for a deposit is my priority. Saving for anything else is impossible.”

A lot of people will be feeling like Kat – like their income doesn't allow them to make a choice between having a life, saving for a home and putting away for a pension. But, if not now, when should we start saving? To clear this up, we talked to pensions expert Tom McPhail, head of retirement policy at Hargreaves Lansdown.

Why should we bother preparing for retirement in our twenties?
Young people should definitely be thinking about pensions, says McPhail, even if they don’t own a house yet. “A 25 year old saving to age 67 who delays starting a regular contribution by five years would see their projected pension fall by 23.6%.” That’s all well and good if you’re lucky enough to be working a job that pays enough to be able to save at the end of the month. It would seem that few of us are.

Meredith is freelance and 27 years old, for example. She earns less than £30,000 a year and lives in London. “Is there really any point putting money aside? If I could, I obviously would, but saving is a struggle. I’m worried that inflation will happen, so in 40 years time my £10,000 will only buy me a Freddo. Perhaps making the most of our salary now is better than saving and living on the breadline.”

Starting young might sound scary, but might be as scary as not having a pension at all. According to Standard Living, to have £10,000 a year to live off when we’ve retired, we’d need to save £149 a month if we start saving at 30. If we wait until our late 30s or 40 to put pension money aside then yes, (gulp) we need to save £290 a month for the same result. Better, they say, to start now.

McPhail agrees – pointing out that, whether we’re saving for a house or a retirement, setting some money aside is crucial. “If you don’t make any private pension provision then you’re not going to have much of a retirement. The state pension is only £8,000 a year; could you live on that? If you don’t own your own home you'd have to pay rent too? For most people, at least some private pension savings are pretty much a necessity.”

Use your employer
An employer pension scheme might be the way to go. Although when you’ve got student loan, tax, and NI coming out of your paycheck it can feel like the more that comes out, the more you suffer. But this really is too good an opportunity not to take advantage of. If your employer contributes to the scheme, any money you put into the scheme will be topped up twice, firstly by your employer and secondly by the government because of tax relief.

McPhail thinks paying into a work pension is the way forward: “Opting into a workplace pension is one of the best financial decisions you can make. You’ll double your money with every pound you pay in.”

Freelancer?
If you don’t have a work pension or you’re a freelancer, then you should consider starting a personal pension. This is when you make a monthly payment into a plan, and then opt for what your pension fund will invest in. These will be presented to you as a selection of choices when you opt to get a pension, and will include a mixture of assets, like houses, shares, and cash.

This is all about keeping your money safe, because if for some reason one of these crashes, then having a mix of investments should keep your money afloat. You don’t need to worry about this. It’s the bank’s job to invest your money carefully, although anyone paying attention to the financial crash of 2008 will not be reassured by this. A financial advisor can help you pick the right pension scheme.

Pension alternatives
If you feel like it’s too soon to tie up any savings you have, then opening an ISA might be best. You don’t need to put a certain amount on every month, although making sure, say, £50 leaves your account and tops up automatically is a good start. An ISA means you can save tax-free: the money you have in it doesn’t need to be declared, and you can add up to £15,240 a year.

McPhail suggests that in the short term ISAs might make the most sense. “Everyone’s first priority should be to have a readily accessible cash reserve which they can draw on if needed. Saving money into a stocks and shares ISA is a good medium term strategy and you can flip money over from an ISA to a pension later. However it is also a good discipline to at least start a pension as early as possible, even for a nominal sum.”

To conclude...
There are no quick fixes to getting rich, and the same applies for your pension. It’s something that requires resilience and patience. See it as a reward for those endlessly long days slogging through work documents and try, even if you can, to save £50 a month. £50 a month for the next 40 years will give you a £24,000 pot so subsidise your future diet of homegrown vegetables. Surely that’s worth sacrificing a takeaway and a few beers every month for?