Top 5 Reasons to Invest in your Pension Early

1. Start early to benefit from compounding

One of the advantages of starting a pension early is the time that you have for the money to grow. Not going into the full details of compounding, very simply, it means that your investment returns generate a greater numerical value over time. To summarise this, even small contributions made in your 20s can grow significantly by the time you reach pensionable age. Don’t be one of those people who leaves their retirement planning until they are 50!

2. Tax relief/free money

The great advantage with the pension wrapper is it offers two ways to benefit from ‘free money’ Investors get so caught up with a difference of a few percent of investment return however, some of the biggest gains can be used by taking advantage of tax free money.

• Employer contributions – Many employers will match, or exceed, the contributions you choose to pay into your pension. The amount they will actually match is dependent on the employer itself. The key point is to maximise the employer match that is available to you, if you are not, you are missing out on Free Money.

• Tax relief – The second benefit is the tax relief that is received from contributing to a pension. Contributions to a pension scheme are eligible for tax relief. Therefore, this means that for every contribution that you make into the pensions scheme (depending on the tax bracket), the government gives you back a certain percentage. To check the percentage you will receive, it is advisable to check the UK government website. In addition to this, there is no tax on the investment growth within the pension pot - Free Money. There can be tax when you come to draw the money down from the pension. At this point, it is essential to speak with a financial adviser to guide you on the most efficient way to do this.

3. Financial independence

People are living longer these days!

Simply put, unless you plan to work for the rest of your life, this means you’ll spend more years in retirement and will need a larger amount of money to support it. For a moderate lifestyle in retirement, which includes an annual foreign holiday and some financial security, it’s estimated that a single person will need £24,000 per year. Realistically, is this going to be covered by the state pension… NO! This means that to achieve financial independence, it is essential to get a plan in place early to support you with this.

So, if you want more holidays and a better lifestyle, contributing to a pension is essential!

4. Investments can be managed within them

Yes, a pension involves contributing to investments that (hopefully) grow over time. But you don’t need to be an investment expert. There are two options that are available to you:

1.) Pick the Recommended Fund - Most pension providers offer a ‘Lifestyle’ investment strategy. This strategy manages which investment funds your pension contributions go into without requiring any action from you. It invests your pension pot in the suitable risk profile for your current age and predicted retirement (which theoretically generate higher returns early in your career). Gradually the risk will reduce as you approach retirement to reduce the volatility as there is less time horizon until you need the money. The key again, is to start this as early as possible so you can benefit from this growth.

2.) Speak with a Financial Adviser to Manage this - This can be a great way to have you pension pot managed. By speaking with an adviser, they can create a bespoke portfolio to align with your risk profile. This can then also be regularly managed and reviewed so you know that it is keeping up to date with the current market conditions. The other benefit of this will be the advice you will be able to receive once the pension is in drawdown. This is essential to make sure you are taking the pot in the most efficient manner.

5. It is easy and efficient!

If your employer provides a pension scheme, you can easily set up your contributions by opting in and maximising the employer match. Once done, contributions will be automatically deducted from your monthly salary and invested into your pension. These contributions do not need to have a massive impact on your take home pay, they will come out almost unnoticed. Cutting back on a few non essential areas in your day to day living will have a massive impact on your long term retirement.

Secure your financial future today!

Investing in a pension as soon as possible is arguably the best financial decision you can make. If your employer offers a pension scheme, what is there to loose by maximising your employer match? By doing so, you are giving yourself piece of mind that you will have a secure financial future. If they don’t offer one, there are many personal pensions that you can take advantage of to still benefit from the tax relief!