Mindful Money
Dec 18, 20193 min read

Pensions explained: how to invest for the future.

Laura – Thrifty Londoner portrait

by Laura – Thrifty Londoner

Pensions have an unshakeable reputation for being boring and mind-numbingly dull- but what’s dull about protecting your future?

It’s time to do some digging and reveal what pensions are really all about. Pensions are a really important investment to make for your future to ensure that you can still enjoy a good standard of living in old age. Consistent contributions to your pension scheme even offer the possibility of retiring early – which I’m sure our future selves would thank us for. Because of advances in healthcare we can expect to have a longer lifespan than our grandparents. Unfortunately this means that, unless we have an adequate amount of money stashed away in our pension, we will be working well into our 70s to cover our cost of living.

Last April, the minimum required workplace pension contribution for employees increased to 5%, with minimum contribution for employers increasing to 3%. Check your employee benefits package to see up to what percentage your employer will match your contributions. For example, if you have a generous benefits package, it might stipulate that if you contribute 10%, your employer will also match it at 10%. If you’re in a position to do so, you should contribute at least up to the amount that your employer will match. The employer contribution is essentially free money towards your future, so it’s a no brainer.

So what happens when you contribute to a workplace pension?

You will receive tax relief on any contributions that you make, and your money usually gets put in low-risk investments. Once you have contributed money to your workplace pension, it’s worth noting that you can’t get this money back again until you decide to retire.

The age at which you can start to withdraw your state pension varies – I did a quick check on the gov.uk website and I will be able to start withdrawing from my state pension aged 68. You can currently withdraw your workplace pension around the age of 60-65. If you end up living to 100 years old, your workplace pension needs to last you 35-40 years! You’ll need a lot of money to cover your standard of living for all of those years which is why you should start investing in your pension now if you are not already doing so. The earlier that you start to contribute to your pension, the better. That’s due to something called ‘compound interest’ which is when you make interest on interest. For example, you are 25 and invest £100, the following year you have £110 as you’ve received 10% interest, the following year you earn interest on £110 instead of £100, and so it goes on for years and years and years. If you start investing aged 40, it means that you will have to put much more money away each month towards your pension and will never quite catch up to the person who started investing in their pension aged 25. You can bet that no one has ever got to 65 and wished that they had put less money aside for retirement. If you want a freezer stacked with choc-ices and the most comfortable slippers on the market when you’re older, there is no time like the present to start contributing to your pension scheme.