When should you start a pension?

A simple answer is ‘as early as possible’ but is that correct? Chartered financial planner Jason Witcombe explains.

There is a general misconception that retirement planning means paying money into a pension.

However, the key to a financially secure retirement is having enough money and to an extent it doesn’t matter whether it is in a pension, an individual savings account (ISA), investment portfolio or even cash under the mattress, but we wouldn’t recommend the latter!

An Englishman’s home is his pension

In addition, paying down a mortgage is just as valid a way of saving for retirement but many of us forget to think of it in this way.

The sooner you can get your mortgage paid off, the more spare income you will have from your monthly paycheque to put into pensions and other investments.

So, try to think of pensions as just one part of the retirement jigsaw.

Pensions have some quirky tax breaks for some people so if you can figure out where you stand with those and use the rules to your advantage, you'll get more bang for your buck.

Free money from your boss

The first place to start should be to double check how your employer-sponsored pension works, if you have one.

On top of standard contributions, many employers will match any payments you make. That’s a fantastic benefit (free money basically) and worth taking advantage of.

Take some time to acquaint yourself with what is on offer. Speak to your HR department so you don't miss out on free pension contributions from your employer.

Greater tax relief

The most efficient way of saving into a pension is to receive a high level of tax relief on your contributions but to only pay basic rate tax on your retirement income.

The top rate of income tax is 45% for those earning over £125,140 but someone earning £50,271 or more can get 40% tax relief.  

That means that it only costs £60 out of net pay to get £100 into a pension. In fact, there are groups of people who can get even greater tax breaks.

However, income between £100,000 and £125,140 effectively suffers a 60% income tax, which can be mitigated through a pension contribution.

Child Benefit

Also, where a household receives Child Benefit, and the higher earner brings home more than £60,000 per year, they would start to lose this, but a pension contribution can help you retain it.

As Child Benefit is paid per child, the more kids you’ve got, the greater the benefit of the pension.

What puts some people off pensions is that you can’t draw benefits before the age of 55.

That may not be a problem if you are 45 but if you’re in your 20s, that’s a long time to have money tied up. So, this is a good reason to adopt a multi-faceted approach to retirement planning.

Separate your eggs

As with everything in life, it’s best not to have all your eggs in one basket and to try to look at the bigger picture when creating a financial planning strategy.

It might seem counterintuitive to delay pension contributions as you should start early to benefit from year on year of rolled-up returns, but such a strategy can work well in certain circumstances.