The global pandemic has had many adverse effects on the state of the nation’s finances, particularly for young people.
Although in many ways it has been widely recognised as a huge success in protecting jobs, the Furlough scheme has required many people in the UK (especially those in their 20s who were disproportionately affected by job security during the pandemic) to become accustomed to living off 20% less of their take home pay. Since the government introduced changes this year to the amount it will pay in the scheme until it’s eventual demise, this has since increased to 30% from 1st July.
Naturally this has led many younger people to seek ways to maximise their take home pay. Saving for retirement during this time has become something many younger generations have had to reconsider by either reducing the amount paid into a pension or choosing to stop contributions all together.
Having readily accessible cash has obviously been a life saver for many people during this time and has been equally as important, if not more, than saving for retirement. But what are the implications of not making regular contributions to a pension?
The effects of compound interest
By not making contributions as early as possible, younger people miss out on the benefits of compound interest and long-term growth to make their money work harder for them until they retire. Take for example an assumption of a 5% annual return, investing £200 a month from the age of 25 with no existing fund value. This will give you £96,000 towards your retirement. The same pot can be achieved by saving £400 from the age of 45. However, the effect of compounding interest has longer to work from age 25 so it will leave you with a pension pot over twice as large.
How much should you save
With the new state pension currently capped at £175.20 per week and expected to grow by just 2.5% annually, growing a healthy pot couldn’t be more important for those who someday dream of living comfortably in their silver years. To keep up with the cost of living, it is recommended that a person at the age of 68 has a fund value of 7x their annual household income in their pension pot in order to maintain a similar standard of living as in their working life (assuming an average household income in the UK with typically two working adults and two state pensions).
So saving early really is key
There’s really no denying that saving early can provide a much more comfortable and rewarding retirement. Sure, making regular payments into a pension throughout the past 18 months has certainly had to take a back seat for many who have had to become accustomed to a drop in their income. But as we begin to enter some form of normality, it should once again be top priority for anyone looking to ensure a happy and healthy retirement.