Updated 25 July 2017
Have you seen Workie? We think he’s rather sweet. But love him or loathe him, there’s no ignoring the monster in the room: the need for everyone to start a pension as soon as possible. Why the hurry? Here’s why.
He’s been called everything from ‘psychedelic Honey Monster’ to simply ‘childish’, but ‘forgettable’ isn’t on that list. The wall-eyed purple-green thingummy known as Workie is the hirsute mascot of workplace pensions, on a mission to remind us all about the importance of auto-enrolment. (Well, if meerkats can sell car insurance…)
In fact, the ‘childish’ accusation is probably welcome. We’ve been conditioned to think of pensions as products for old people. Uh-uh, #epicfail, as your mum might say. Sure, you use pensions when you’re old… but they really aren’t much good unless you start them when you’re young. So a purple-haired cuddly toy is actually a lot closer to the pension-buying market than a grey-haired man will ever be. It might even encourage a few young children to start pensions (believe it or not you can do this, with amazing results – though of course they’re not workplace pensions).
But why is it so much better to start a pension when you’re young (and probably already strapped for cash)? Because it’s your best chance of being wealthy one day.
Pension calculator: the ten-year challenge
To demonstrate the importance of starting early, here’s a comparison of two different workplace pensions started just ten years apart. First, let’s suppose our employee Esme starts a workplace pension as soon as she can, at the age of 22. She pays in £80 a month, which her employer matches (not all employers will match contributions, but many do – some even exceed them). Her £80 is further enhanced by tax relief at 20 per cent. Let’s further suppose that her pension fund grows by a reasonable 4 per cent each year.
|Tax relief at 20% makes this up to:||£100*|
|Total monthly amount paid in:||£180|
|Pension fund growth||4%|
* Notice that this isn’t £80 increased by 20 per cent. It’s actually more, because the money is paid in from your gross salary before 20 per cent tax is deducted – so what would be £80 of net salary becomes £100 of gross salary. If you find this aspect of pensions confusing, you are not alone.
Assuming all these figures stay the same throughout Esme’s career, how much would her final pension pot be worth? Here’s how much:
|Value of pension pot when Esme is 65:||£247,500|
Near enough a quarter of a million pounds. That’s the sort of pension pot generally associated with wealthier people, yet all Esme never paid in more than £80 a month.
But suppose Esme opts out of her workplace pension, so as to have a bit more take-home pay? Let’s say she waits ten years, and starts at age 32. Assuming exactly the same contributions and growth – but only 33 years of saving instead of 43 – Esme ends up with a final pot of:
If you’d seen that figure first, you might be impressed. It’s still a healthy-sized pension. But it’s nearly £100,000 less than a pension started ten years earlier. That’s £10,000 difference for every extra year of saving – and yet it cost Esme only £960 a year in contributions. Once again: £960 a year to make £100,000 of difference over ten years. That’s a rate of return equivalent to 1,042 per cent.
Now that’s monster.
To talk to a financial adviser about starting a workplace pension (or any other kind of pension) find one local to you using our search. You can also find out more about pensions in general on our pension pages.