Today’s loose change is tomorrow’s pension pot

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Remember studying for exams? I sometimes fell into the trap of trying to cram a year’s worth of lectures into a few days and it never worked. A little and often was always the best way and it certainly made life a lot less stressful. 

Planning for retirement is just the same and if you can squirrel away a little bit of money each month the chances are you won’t even miss it. But it’ll make a massive difference when you come to the end of your career and start thinking about generating a retirement income. 

Start saving early

The sooner you start making pension contributions the longer your money has to benefit from any interest you earn and any capital growth you enjoy. If you’re in a workplace pension scheme then you’ll also benefit from the contributions made by your employer and the difference these can make are explained in an earlier blog. 

But if you leave saving for retirement until the last minute then you’ll have to make much larger contributions to match what you would have saved by making smaller ones over the course of your career. The example outlined below shows that if you started saving early, small regular pension contributions can amount to almost £100,000 over the course of your career. But if you start saving late there’s no guarantee you’ll have the money to build up this sort of pot. 

In the early stages of your working life it might feel like your budget’s too tight to put money into a pension, but it’ll cost less than you think and make a bigger difference than you’d believe. 

Building a pension pot

Imagine you’re a 28-year-old woman and your annual salary is £23,000. You decide to join your workplace pension scheme and you contribute 5% of your salary and your employer contributes 2%.

The 5% you put in works out at £96 a month or £3.16 a day. You’ve probably got more loose change in your pocket and if it went straight into your pension would you really miss it?

Using our online calculator it’s quick and easy to work out what size of pension pot you could build up depending on the amount you put away each month. Taking the example above where you contribute 5% and your employer puts in 2% you could expect to have built up a pot of £99,200 by the time you’re 68. Over the course of your career that’s almost £100,000 for the loose change in your pocket.

Planning for retirement doesn’t mean missing out

But could you save that money without impacting the lifestyle you enjoy? That’s something you’ll have to decide for yourself, but it might be easier than you think. If, for example, you always buy soup and a sandwich at lunchtime you could save at least £3.16 a day by taking your own lunch to work. Do you buy a coffee every morning and if so could you wait until you got to the office and make one there? 

What about the mobile phone, internet and TV packages you’ve signed up to. If you’ve got the latest smartphone do you use it to its full potential or would another model that costs less do the job just as well?

There are lots of little changes we can make in our lives to stop us frittering away money and if you then channel that cash into pension savings it’ll grow into something really meaningful over the years. 

I don’t want you to think that pension planning is all about penny pinching, it’s not. It’s about looking at where you spend your money today and asking whether you’d get better value by saving it for tomorrow. It’s about realising what small monthly contributions will add up to over 40 years and understanding how important having a large pension pot is when it comes to generating your retirement income.

Will you really begrudge making your lunches when you’re enjoying the retirement lifestyle you’ve always dreamed of?