Why starting a pension early is important?

Jul 20, 2024 | Financial Planning, Investments, Pensions

Starting a pension early is crucial for several reasons:

  1. Compound Growth: The earlier you start, the more time your money has to grow through compound interest. This means your savings can grow exponentially over time, even if you start with small contributions.
  2. Tax Relief: Pension contributions often come with tax benefits. For example, the government adds tax relief to your contributions, effectively boosting your savings.
  3. Employer Contributions: If you’re enrolled in a workplace pension, your employer will usually contribute to your pension pot as well. Starting early maximizes these contributions over your career.
  4. Financial Security: Building a substantial pension pot early on can provide greater financial security in retirement, allowing you to maintain your lifestyle and cover unexpected expenses.
  5. Flexibility: Starting early gives you more flexibility to adjust your contributions as your financial situation changes. You can start small and increase your contributions as your income grows.

Let’s dive deeper into each point:

  1. Compound Growth:
    • How it Works: When you invest money, you earn interest on your initial contribution. Over time, you also earn interest on the interest that has already been added to your account. This compounding effect can significantly increase your savings.
    • Example: If you start saving £100 a month at age 25 with an annual return of 5%, by the time you reach 65, you could have around £150,000. If you start at 35, you might only have around £82,000.
  2. Tax Relief:
    • Benefit: Pension contributions are often tax-deductible. This means that for every £100 you contribute, the government might add an extra £20 (if you’re a basic rate taxpayer), effectively boosting your savings.
    • Impact: This tax relief can make a significant difference over time, increasing the total amount in your pension pot.
  3. Employer Contributions:
    • How it Works: Many employers offer to match your pension contributions up to a certain percentage of your salary. This is essentially free money added to your pension.
    • Example: If your employer matches up to 5% of your salary and you earn £30,000 a year, that’s an extra £1,500 added to your pension annually.
  4. Financial Security:
    • Importance: A well-funded pension can provide peace of mind, knowing you have a financial cushion for your retirement years. It can help cover living expenses, healthcare costs, and any unexpected financial needs.
    • Long-Term Benefit: The more you save early on, the less financial stress you’ll face in retirement, allowing you to enjoy your retirement years more fully.
  5. Flexibility:
    • Adjusting Contributions: Starting early gives you the flexibility to adjust your contributions based on your financial situation. You can start with smaller amounts and increase them as your income grows.
    • Life Changes: This flexibility is crucial as your financial responsibilities change over time, such as buying a house, raising a family, or dealing with unexpected expenses.
At GoddardFry we are well positioned to help you understand, start and review your pension needs. With access to a range of providers through our independent status we can find the right solution for you, helping you to achieve your retirement goals. Why delay start today!


By Nick Roberts DipPFS, (Financial Planner)
Nick@goddardfry.co.uk