There is an old saying in the pensions business which goes: ‘It’s the first pound you invest, that makes you the most money.’
This simple fact goes to the core of pension saving, and contains a grain of wisdom for all those starting out on their working life today. The fact is that the ‘golden years’ for pensions saving are not the years as you approach retirement. They are the first decade of your career, between the ages of 20 and 30. It is the pension savings invested into the stock market at this stage that have time to grow and which form the bulk of your pension pot, upon retirement.
It has been calculated that the first £1 saved into a pension fund, in your early 20s, and exposed to the stock market for 4 decades, can have grown to £28, by the time you retire!
That kind of growth is simply not achievable, later on.
Unfortunately, in our 20s and 30s there are all manner of reasons to postpone kicking off our pensions saving. These are the years when we take on most of the debt we will incur during our lifetime. Belts are tight, and the cost of getting married, taking our first mortgage and buying our first home, and starting a family are financial distractions which can take precedence over pensions saving, for a time.
Nonetheless, in pension terms, there’s no replacing these golden years, if you miss out on saving early on.
In fact, as a rule of thumb, if you decide on a target pension pot to be achieved by your 65th birthday, you would have to up your monthly contributions by 10%, for every 6 months you delay in starting to save!
Unfortunately, Halifax informs us that the average age for starting pensions saving in the UK is 32 – indicating that most of us miss out on the whole decade of our 20s altogether.
In pensions saving, however, there is no replacement for a long investment horizon.
They say that time is ‘the great healer’ - but he is a great investment manager as well.
