Start your pension today

16 April 2014

The complexity of pensions - not to mention the money that needs to be paid into them - can make starting yours a chore that is always being pushed to the bottom of your to do list.

However, putting off starting a pension can be an expensive mistake – indeed a survey from Standard Life found that UK savers' biggest financial regret was not saving enough for a pension. Second in line was frittering money away and running up debts on credit and store cards, all factors that will come between you and a comfortable retirement.

Not least among the reasons why you should start a pension as soon as you can is that pension savers benefit from compound interest where interest being paid upon interest effectively means the longer you have to save the less you have to put away. So, the sooner you can start saving the better.

The cost of delay

"Delaying starting a pension from age 25 until age 30 will slice between a quarter and third off your retirement income," warns Tom McPhail, head of pensions research at Hargreaves Lansdown. "If that feels a bit abstract, think of it in terms of your pay being cut by that much right now; how much impact would that have on your standard of living today? That's what you'll be faced with if you delay starting your pension."

Of course if you are already over 30 and haven't yet started to save, the important message is it's not too late - you'll just have to put a bit more money away to achieve the same goal.

Don't pensions have a lot of bad press?

Pensions haven't had a great press in recent years. "Much of the public has a negative perception of pensions," says Patrick Connolly, IFA at Chase De Vere. "This is often based on little more than sentiment, comment from friends and family and press articles they have read which might not be particularly relevant to them."

He adds: "This perception isn't helped by the constant meddling from politicians meaning that pensions legislation seems to be constantly changing, which doesn't exactly create confidence in the pensions industry."

However, while savings vehicles such as Isas and buy-to-let property can be used to help you save for retirement, for the vast majority of people they are rarely as effective as a pension, which is specifically designed for the purpose.

Is your home your pension?

Don't say 'no' to free money

They key advantage that pensions have over other savings vehicles is that to incentivise you to save, other parties will pay into them on your behalf.

People who save in a pension get the benefit of tax relief at their marginal rate. So in plain English that means it only costs basic rate taxpayers 80p to invest £1 while higher rate taxpayers only have to pay 60p. Put another way if a basic rate taxpayer invests £80, or a higher rate taxpayer invests £60, the government will top up that contribution to £100.

Pension rules explained

Are Isas an alternative to pensions?

Isas have tax advantages too - all money held within an Isa wrapper grows free of income tax and when you cash it in you won't be liable for any capital gains tax. They are more flexible than pensions too - you can access your money at any time you like, while pension savers can only get their hands on theirs from age 55.

However that tax relief up front - which really benefits from compound growth over the years - generally gives pensions the edge. And because your money is locked away for the long term you won't be tempted to blow the savings you've set aside for your retirement.

Pensions v Isas: what's the best way to save for retirement?

Tax-relief isn't the only reason to pay into a pension. If you are a member of a workplace pension there is a very good chance your employer will pay in too.

So by failing to join your employer's pension scheme, you are effectively turning down free money.

Which pension should I choose?

If you have access to a workplace pension into which your employer contributes - very often matching what you pay in - then this will be the best option for you. Some schemes will invariably be better than others but if your employer is paying in money on your behalf going it alone is tantamount to turning down a payrise.

Workplace pensions: a guide

If you don't have access to a workplace pension - for example you are self-employed or don't work, there are other options in the shape of personal pensions. This might be a low-cost stakeholder or an all singing all dancing Sipp (self-invested personal pension). These are also options if you want to make savings over and above what you pay into a work pension.

Although you don't get the benefit of employer contributions, the money you pay in will still be topped up by tax relief at the rate of 20% if you pay basic rate, 40% if you are a higher rate taxpayer, or 45% if you pay the additional rate.

Personal pensions: a guide

So don't put off saving any longer: join your employer's scheme or look into personal pensions and get your retirement savings underway.

There will be plenty of decisions to make along the way, but Moneywise can guide you to make all the right choices.


Find out everything you need to know about the new pension rules and how to plan ahead for the retirement you deserve with our new magazine, How to Retire in Style. The magazine is available to buy now from all leading newsagents, or can be ordered online at


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