When did you first pay in to a pension?
If you were born in the 1990s or later, there is a fair chance it was when you were 22.
That is because of the launch of pension auto enrolment.
Ever since October 2012, a 22-year-old starting a new job and earning above £10,000 could join their work pension by simply… doing nothing.
Prior to that, doing nothing would have seen them excluded.
In this famous example of nudge theory in action, the Government was taking blatant advantage of people’s distaste for money admin and tendency to take the easy option, and it worked.
It was nothing short of a pension saving revolution. A huge 88 per cent of workers who can save into a work pension do, according to Department for Work & Pensions figures from 2023. That is up from just 55 per cent in 2012.
But now, we’re told it didn’t go far enough.
Retirement fund: Young people have been told to start saving for a pension at 18 – but it will be hard to get motivated amid reports they might not retire until 74
This week, young people found out they should supposedly be saving for their retirement even earlier, at the tender age of 18.
That’s according to the boss of pension firm Legal & General Antonio Simoes – who would of course benefit greatly from people stuffing cash into their pensions for longer.
It won’t come as a welcome suggestion to young people for several reasons.
Not least, that it is easy to suggest that you put more of your hard-earned pay packet towards retirement savings when you earned £10.6million last year like Simoes.
It is also hard to feel motivated to save for retirement when, as a report published by the Institute for Fiscal Studies suggests, you may be working until the age of 74. This is the age it warned the state pension may have to rise to.
Furthermore, a lot of 18-year-olds are now at university racking up debt and in no position to be saving any money at all.
But even if they wanted to save more, young workers are having their finances stretched in all directions.
If they have been to university, a 21-year-old starting their first job will have an average debt of £53,000, according to the latest Student Loans Company figures. Their rent will cost an average of £665 per month for a room in a shared house, according to Spareroom.
They might get pay rises as they move through their twenties, but by that time they are hit by another wave of more pressing financial demands.
If they want to put down a deposit on a home, they need to find an average of £34,500, according to UK Finance.
If they dare to think about starting a family they will need to save up for maternity leave, for most of which they will probably be paid the statutory £187.18 per week.
What young people do have on their side is time. If you can put even £50 into a pension each month, this can have huge benefits
After that, childcare costs an average of £238.95 per week in England, according to MoneyHelper.
It is no wonder this group is the most likely to opt out of their work pension. Last year, research by Barnett Waddingham found 55 per cent of 18 to 24-year-olds had previously opted out of their pension, and over a third of 25 to 30-year-olds.
But opting out entirely isn’t the only option.
Auto enrolment requires you to pay in 4 per cent of your salary, after which the Government will provide 1 per cent in tax relief and your employer will pay in 3 per cent. If they are generous, they might pay more.
If you’re struggling, you may be able to pay in less. While your employer’s contributions might reduce or stop, you’ll still get the benefit of compounding gains on investments.
What young people do have on their side is time. If you can put even £50 into a pension each month, this can have huge benefits.
Even if you never increased your contribution, paying in £50 per month from the age of 22 to 67 would deliver a £172,000 pension pot. That is based on an annual return on your pension investments of 6 per cent.
This is also helped by Government tax relief on pension contributions, which would instantly turn your £50 into £62.50.
If you can pay in £100 a month instead, this would give you a pension pot of £276,000 after 45 years.
And if you managed to boost that later, for example when you get a pay rise, your pot would grow even more.
This week, the Government launched a Pensions Commission to address the poor pension prospects of those not included in auto-enrolment – including low earners and the self-employed.
The Government also lamented the fact that, while auto enrolment boosted participation in workplace pensions, many workers ‘only’ put aside the minimum contribution level.
That’s a tougher ask than it sounds for many – but if it is going to change, spelling out how even a small pension contribution can turn into £172,000 might be a good place to start.
And if you are older and feeling generous, consider paying £50 a month into a pension for your children or grandchildren. One day, they’ll be very grateful.
SAVE MONEY, MAKE MONEY
Sipp cashback
Sipp cashback
Up to £2,000 cashback until 31 July
.JPG)
5.44% cash Isa
5.44% cash Isa
Rate boosted for three months, then 4.59%
£20 off motoring
£20 off motoring
This is Money Motoring Club voucher
Investing Isa offer
Investing Isa offer
1% back (max £200) when adding £5,000+
.JPG)
No fees on 30 funds
No fees on 30 funds
Potentially zero-fee investing in an Isa or Sipp
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence. Terms and conditions apply on all offers.