Why starting a private pension early pays off

by Charlie Sammonds

The full state pension currently stands at £203.85 per week – this is just £10,600 a year. For a lot of people, this won’t match up to the golden ‘two-thirds of your previous income’ rule. 

This means that it’s rarely been more important to consider bolstering your retirement income with your own personal pension. This additional income can make all the difference in retirement, particularly against the current economic backdrop. 

For a lot of people, retirement is a distant consideration. Other major financial goals understandably take centre stage, like buying a house or saving for a wedding. However, it pays to get started earlier with a private pension. 

The benefits of starting early 

We’re all guilty of putting things off. For most things in life, this isn’t too much of an issue. The problem comes when starting early can have a material positive impact on the long-term outcomes. 

The truth is that, the earlier you start paying into a pension, the easier it will be to hit your retirement goals. Leave it too late and you’ll be playing catch up – the longer you wait, the more you’ll have to pay in every month to hit your targets. 

This chart displays an investor looking to reach a pot of £300,000 by 65. The assumed growth rate is 5% with a fixed contribution at the end of each month. For simplicity, no fees have been taken into account, and inflation does not affect the figures.

As the chart above demonstrates, to achieve a pension pot of £300,000 by 65, you’d have to put aside a massive £512 a month if you started at 40. Getting started at 30 brings that down to £271 while any forward-thinking 25 year old would only have to contribute £202 a month to reach that figure. The longer you leave it, the more likelihood of you having to settle for a lower income in retirement. 

Put your money to work

There’s a powerful force at the heart of long-term investing: compounding interest. This is the idea that, as your investments generate returns, those returns begin to generate returns of their own, and so on. This theoretical snowball effect is what we call compounding interest and it can make a huge difference in the long run. 

Because, for most people, retirement saving is a very long-term project, you naturally have plenty of time to see compound interest in action. It also means that your earliest contributions become your most important, because these have the longest time to feel the effects. 

It does need to be said that, as with all investing, there is no guarantee of making money and there is always a chance that you could get back less than you put in. Over a long enough timeframe, however, the inherent risk in markets is reduced. 

Automate your retirement investing

With retirement investing being (for most people) an inherently long-term process, it’s important to make it as frictionless as possible. This is where modern platforms and cutting edge investment technology can make a real difference. 

You don’t need to be investing a lump sum every year, or manually making investments every month to keep your pension pot growing. With an InvestEngine SIPP, you can set up a Savings Plan to automatically invest on a weekly, biweekly or monthly basis. 

This means you can get on with other, more immediately important things in life, safe in the knowledge that your pension pot is steadily growing and your cash is being automatically invested in line with your chosen portfolio weights. 

So, for anyone who wants to take the hassle out of investing for retirement, an InvestEngine SIPP gives you complete control and unparalleled ease-of-use. You can get a head start on your retirement finances by creating an investment plan that suits your goals – either managed by you or our team of experienced portfolio managers. Register your interest below for exclusive access when the SIPP launches in the coming weeks. 

Important information

Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.

This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.

Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.

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