Personal Pensions
Most people these days will have a money purchase pension scheme with their employer as final salary schemes have become uneconomical and expensive to run.
If you do have a final salary pension scheme then you are very lucky as this means you will receive a percentage of your final salary upon retirement for the rest of your life which may also increase in line with inflation. The amount you get will depend on how long you have worked for the company your pension is with - so, for example, you may receive 1/60th of your final salary for every year that you have worked. This type of salary is rare now as it is difficult for companies to afford and budget for the risk that they take on when administering this type of scheme.
Money purchase schemes are far more common these days. In a money purchase scheme your employer will pay a percentage of your salary in to the scheme, you pay a percentage of your salary in to the scheme and the government adds a contribution as well. To benefit from this as much as you can, you should start contributing as early as possible and as much as possible. As an example, your company may match your contribution up to 10% which would mean that if you were on a salary of £25,000, you would be contributing £2,500 per year to your pension and your company would also add £2,500. However, because your contribution is paid before you pay tax, it actually is costing you less than £2,500 and the government makes up the difference. If you are on the higher rate of tax, then you will also be able to claim further tax benefits as currently you only receive the 20% tax break on your pension automatically and you need to claim for the higher rate either by talking to your tax office or filling out a tax assessment form.
Being part of your company pension scheme should be a 'no brainer' as you essentially are being given free money towards your retirement. Therefore, start contributing as soon as you can and as much as you can afford. Even if you can only afford the minimum contributions, it is really worth doing, as you get the free money from your employer, and you kick start the wonder of compound interest.
“Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn't, pays it.” -Albert Einstein
Essentially, compound interest is where you not only earn interest on the initial sum invested, but also the interest previously earned on that initial sum. What this means is that your money can really start to grow, even from relatively small amounts given enough time. The key here is TIME. This is why small investments in your 20s and 30s are much more powerful than larger investments in your 40s and 50s. Here's an example:
You invest £1,000 when you are 25 with an interest/growth of 3%. After a year you will have £1,030 (£1000 x 3%). In year 2 you earn another 3% on the full £1,030, and so you earn £31 (not £30 as in year 1) giving you a total of £1,061. After just 15 years, that original £1,000 is now worth £1,500. Now you may think that this gain is fairly small, but this is just using relatively small numbers to explain a principle. What if you are saving £5,000 a year, and the growth rate is 8%, and you increase the amount you save as you get older? This is what compound interest does for you and this is one of the main drivers to making an earlier retirement possible.
If you do have a final salary pension scheme then you are very lucky as this means you will receive a percentage of your final salary upon retirement for the rest of your life which may also increase in line with inflation. The amount you get will depend on how long you have worked for the company your pension is with - so, for example, you may receive 1/60th of your final salary for every year that you have worked. This type of salary is rare now as it is difficult for companies to afford and budget for the risk that they take on when administering this type of scheme.
Money purchase schemes are far more common these days. In a money purchase scheme your employer will pay a percentage of your salary in to the scheme, you pay a percentage of your salary in to the scheme and the government adds a contribution as well. To benefit from this as much as you can, you should start contributing as early as possible and as much as possible. As an example, your company may match your contribution up to 10% which would mean that if you were on a salary of £25,000, you would be contributing £2,500 per year to your pension and your company would also add £2,500. However, because your contribution is paid before you pay tax, it actually is costing you less than £2,500 and the government makes up the difference. If you are on the higher rate of tax, then you will also be able to claim further tax benefits as currently you only receive the 20% tax break on your pension automatically and you need to claim for the higher rate either by talking to your tax office or filling out a tax assessment form.
Being part of your company pension scheme should be a 'no brainer' as you essentially are being given free money towards your retirement. Therefore, start contributing as soon as you can and as much as you can afford. Even if you can only afford the minimum contributions, it is really worth doing, as you get the free money from your employer, and you kick start the wonder of compound interest.
“Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn't, pays it.” -Albert Einstein
Essentially, compound interest is where you not only earn interest on the initial sum invested, but also the interest previously earned on that initial sum. What this means is that your money can really start to grow, even from relatively small amounts given enough time. The key here is TIME. This is why small investments in your 20s and 30s are much more powerful than larger investments in your 40s and 50s. Here's an example:
You invest £1,000 when you are 25 with an interest/growth of 3%. After a year you will have £1,030 (£1000 x 3%). In year 2 you earn another 3% on the full £1,030, and so you earn £31 (not £30 as in year 1) giving you a total of £1,061. After just 15 years, that original £1,000 is now worth £1,500. Now you may think that this gain is fairly small, but this is just using relatively small numbers to explain a principle. What if you are saving £5,000 a year, and the growth rate is 8%, and you increase the amount you save as you get older? This is what compound interest does for you and this is one of the main drivers to making an earlier retirement possible.