If you’re thinking about starting to save for retirement in your 20s, congratulations – this is the perfect time to start a pension. With pensions the advice is always the earlier the better, as it means you can save less each month than if you started at a later age and still can build a substantial retirement fund. In addition to this, starting a pension in your 20s enables you to make investment choices that could yield you better returns in the long term, and it might even give you the ability to take early retirement.
Whether you’ve just graduated from university and are about to start your first job or have been working since you left school, when you are in your early 20s you are still at the beginning of your career. This means that you will probably be working in an entry-level position and, as such, earning less than your more established colleagues. As well as this, if you did go to university you will likely be paying off student debts.
While record numbers of those in their 20s are living with their parents*, this is traditionally the decade when you move away from home and start living independently for the first time. This means that if you are in your 20s you will be learning how to manage your household finances for the first time, and you could even be trying to save for a house deposit. Your 20s is also a time when you may want to socialise regularly and travel, or you may be planning to settle down and have children, in which case you could be thinking about saving money for a wedding. With so many different things competing for your money, when starting to save for retirement at this age you must be realistic about the amount you will be able to save each month, but remember that even a small amount is better than nothing.
The amount you will be able to put towards your retirement savings each month will depend on your personal circumstances – you will need take into account how much you earn each month and how much you have going out, as well as anything you may be saving towards, for example a house deposit or a wedding. Generally, the advice is to save as much as you can, but realistically you need to save what you can afford and fortunately by starting young you will still be able to gain a good retirement fund by saving just a small amount each month.
To give you some sort of guideline with the amount you should aim to save you will need to work out how much income you’ll need when you retire – you can do this through a pension calculator. But remember, it is important to pay off or avoid debts before you start trying to save. This is because the interest you will have to pay on money you owe is normally more than you gain from savings, even in a high interest savings account.
There are a number of ways you can start saving for retirement at 20, but one of the easiest ways to start a pension is to join your Workplace Pension Scheme. At the age of 22 you will automatically be enrolled in your workplace pension, as long as you earn £10,000 or more. If you are eligible it is usually advisable to allow yourself to be automatically enrolled, because it not only requires you to pay in but your employer has to contribute as well. The money contributed will be automatically deducted from your wages – the amount is normally a minimum of 5%, and your employer currently has to contribute a minimum of 3%.
If you are under the age of 22 you won’t be automatically enrolled, but as long as you earn a minimum of £6,136 a year, you have the right to opt into the scheme and your employer has to make the same contributions as to those over the age of 22. If you earn less than £6,136 per year you can still request access to save into a pension, and your employer has to make arrangements for you do to this, however they are not required to contribute as well.
Along with a workplace pension, there are also other ways to start saving for your retirement. These include setting up a personal pension, saving into a high interest savings account or ISA – the Lifetime ISA can be particularly appropriate for pension saving – and making investments. The right option will depend on your individual needs and circumstances, including the amount of money you have spare to save each month and when you are planning to retire, which is why you may wish to speak to an independent financial adviser before you start your pension plan.
Due to the amount of time your investments have to develop, your 20s is the ideal time to invest money for your retirement. It must be stated that any type of investment is risky and no matter where you invest there is always the possibility of losing money. It is for this reason that you should consider any investments you make carefully and ideally get advice from an independent financial adviser before going ahead.
There are a number of popular ways to invest for your retirement, but one of the more traditional retirement investments is property. Even if you are currently saving up for a deposit for your first home you can consider this an investment for your retirement, as by joining the property ladder in your 20s it will give you plenty of time to pay off your mortgage, so that when you retire you can use your home as an asset to help increase your retirement income.
There are a number of ways to use property for your retirement, including selling your home for a smaller property which will normally give you a lump sum that you can add to your pension pot (also known as downsizing) or through an equity release scheme. It must be noted, however, that just like all investments, buying a property can’t guarantee that you will make a profit as it will depend on the property market at the time you are planning to sell, though normally a house will increase in value in the long term.
One of the advantages of starting a pension in your 20s is that it means you might have the possibility of retiring before the State Pension age. The age in which you can get the State Pension is increasing, and as it stands, those in their 20s can expect to receive it at 68 years old. But you can choose to retire before this by using money saved in your personal or workplace pension (which will usually allow you to access your pot ten years before your state pension age), or by cashing in your other retirement savings or investments. Remember, if you are planning to use money from your personal or workplace pension for early retirement you will need to look at your pension scheme rules to see at what age you can start using your pot, and make sure to think carefully about what you want to do with the money.
When starting a pension it is a good idea to consider when you want to retire and the income you'll require to help you determine how much you will need to save each month for your retirement.
*In 2016 the ONS reported that young adults (aged 20 to 34) in the UK are more likely to be sharing a home with their parents than any time since 1996.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.