Starting Pensions in your Twenties

03 December 2014 - Posted by ebaxter

If like me you started your corporate career over 15 years ago, chances are you’ve got at least one historical pension sat somewhere, if not more. I know I have one with Aviva from back when they were Norwich Union.

Key factors stopping young people starting pensions early in their careers:

Since then, whilst I’ve mainly remained within the same career type I’ve moved around a lot and within companies of various sizes and stages. We don’t work in times like my Dad who is soon to retire from the company he started work with at University. That’s unheard of, if not mythological.

I have to admit that as my career grew and I saw an increase in my salary through my twenties, the idea of putting aside a hundred odd quid instead of having that as readily available ‘slush’ funds didn’t greatly appeal. Old age and being a pensioner was a lifetime away. Not on my radar.

Ask anyone what they visualise when they think of the word ‘pensions’ and they say; “Grandparents”, “Old People”, “Pensioners” and so on and so forth. The word ‘pension’ has a bad image and it’s not one to be easily dispelled.

However, at some point reality has to set in. I’m in my late 30s now and with the way things are I have no idea how I will support myself in retirement. I’m still learning how to manage my money. I thought we were all supposed to have it figured out by now? Be experts with our money, I’m a grown up after all aren’t I?

Well I’ve finally decided I need to do something about it. It helps that because of what I do I’m now looking at this stuff on a daily basis. The latest stats from the ONS (Office of National Statistics) show that men live to an average of 78.7 years and women 82.6 years. According to The Telegraph the average salary is now £26,500…

…now if like me as soon as numbers appear in front of you, your eyes start to cross then that’s as far as you’ll get before your brain switches to auto-divert. As soon as you start thinking about your current age a thousand other distractions swim to the fore. As soon as you start thinking about how much you earn, you think about what you’d like to be earning, or how your friend is earning more or that bonus your other friend got and went to Amsterdam for the weekend…

…and see what happens, it’s this thing in our brain that stops us from thinking about pensions. How can you stick to thinking about that far in the future when there is so much to worry about right now?

Well unfortunately we’ve got no choice, we’ve GOT to do something about it because the reality is there is no safety net anymore. There won’t be anything for us when we get to retirement. Polls already show that people are continuing to work beyond retirement ages. That’s all well and good as we live longer now and let’s face it millennials just haven’t got the first clue about decent customer service but ask yourself this; do you WANT to work for the rest of your life? Literally until you drop?

I know I don’t.

But as dull as it may be and as low down your list of priorities as it probably is, you REALLY do need to start a pension as soon as you can because you can’t rely on anyone to look after you in your later years. The advice is to try and get rid of any unsecured debt as soon as you can, due to the high interest rates you will probably be paying (advice can be found freely and non-judgementally from the National Debt Advice Helpline) but then speak to a company about pension options. Make sure your initial consultation is free and make sure you like who you’re dealing with.

I’m going to simplify it and tell you what your options are.

First let’s start with the dictionary definitions that make everything sound much less frightening.

Or according to Which? Magazine

There are three types of pension – state pension, workplace pensions and personal pensions. All three types are available to everyone, as long as you are in employment.

State pension

When people reach their state pension age (currently between 62 and 65 for women and 65 for men), they will receive an income from the state, called the state pension. 

To claim the state pension you have to have made National Insurance (NI) contributions throughout your working life – you can read more on this and calculate your state pension easily using the State Pension Calculator here.

Workplace pensions

The state pension will not be able to provide all of your retirement income, so most people take out a pension with their employer making contributions. Workplace pensions take contributions from you, your employer and the government, and use them to provide you with a pension when you retire.

Your contributions will take the form of a percentage taken from your salary each month, and your employer's will also be added as a percentage of your pay. 

The fact that your employer pays into your workplace pension is one good reason for having one – it is like extra pay. These contributions will be invested, with the aim of increasing the amount you have to retire on.

There are clear examples on how the Workplace Pensions Scheme on the website here

Personal pensions

These work by you paying money into a pension scheme from a provider (selected by you, rather than your employer, unlike a workplace pension) and getting a sum at the end with which to buy an annuity, although people will have more flexibility from April 2015 onwards.

An annuity is a type of financial product that gives you retirement income for life.

Like workplace pensions, personal pensions invest your money with a view to increasing it. Personal pensions are particularly suitable for the self-employed or people who aren't in work, who don't have access to workplace pensions. But anyone can save into a personal pension.

You can learn more about Personal Pension Schemes on the Campbell Harrison website here following our groovy illustrated messages.

What is an annuity?

I’m still not sure I understand annuities so I’ve taken another explanation from Which? Magazines website:

An annuity is a financial product that allows you to convert your pension savings into a regular income that will last you for the rest of your life. 

When you get a quote for an annuity, you'll be given a rate as a percentage. You'll need to multiply by your pension savings to calculate how much income you'll get every year.

  • So, if you have £100,000 in your pension pot, and are offered an annuity rate of 6%, you'll get an annual income of £6,000 a year. 

Go further: Annuity rates - Understand how annuity rates are calculated and how they differ

Okay, that’s better, I get it now.

The problem we keep knocking our heads against is how to communicate the value and importance of starting pensions early, in your twenties or as soon as you start a career. Like other major life issues such as gender equality should we be teaching kids about pensions in Schools, Colleges and Universities?

Should we make it compulsory for parents to tell their children to start a pension as soon as they start working? Whose responsibility does it ultimately lie with? Because who will be making sure the streets aren’t suddenly infested with the unwashed thousands, like some zombie apocalypse, come 2044?

I don’t mean to make light of this subject and I certainly don’t mean to come across as patronising. I’m aiming more for mildly entertaining purely because we have to find a way to capture the attention of your average Joe. If I know I’m guilty of sticking my head in the sand at my age and struggle to prioritise and take responsibility for how I will continue to exist from my mid to late sixties how in the bajinga do we get twenty-something’s to even seriously consider it?

Starting a pension in your early twenties probably sounds ridiculous but the fact remains that generous final salary schemes and comfortable state pensions are already becoming ghosts of the economies past. It’s a no-brainer that the longer a pension is contributed to, the better it will be.

Key Action Points:

Campbell Harrison is a company based in Sheffield that specialises in Pensions, Retirement Management and Investments. Young, friendly and easy to approach their staff talk in a language that is easy to understand and unintimidating. 

Clare Williams is 37 years old (just) and a Content Strategist at Ignition Search. She has worked in Marketing & PR for over 16 years.

Further Reading: