May 12, 2020

The Benefits of Starting a Pension as Young as Possible

When a person is in their twenties, paying money into a pension fund is often seen as a waste of money and completely unnecessary. On top of that millions of young Britons in the 20 – 29 age group seem to know very little about this very important aspect of financial planning – planning for retirement. A recent poll conducted by ICM for financial services company MRM found that 33 per cent of young people know how to say ‘How old are you?’ in French, while only 10 per cent know the meaning of the word ‘annuity’.

It is probably safe to assume that most of these young individuals also do not know or understand the concept of time value of money. They are simply not aware that if one starts investing £150 per month at the age of 25 this could grow to £395 000 by retirement age (with a yearly growth rate of 7 per cent).  Starting only five years later, at 30, will bring down this amount by £125 000 to only £270 000. And starting another five years later will reduce the balance of the fund to £183 000 by retirement time.

The earlier one starts a pension the more tax breaks can be enjoyed over the lifetime of the pension plan. Depending on how much the taxpayer earns, as much as 45 per cent of the amount invested could be deducted from income tax. That means the individual could end up paying only 55 per cent of the monthly amount invested in the fund out of his or her own pocket.

Another reason to start early is that people nowadays are living longer, which means they need more money to fund their retirement than years ago.  Twenty per cent of people living today are projected to live until they are a hundred or even older.

Related Post - What Is A 401k Plan?

Contractors are often guilty of neglecting their retirement planning until it’s too late. If he or she works for a large company, they will usually have a pension plan, but contractors absolutely have to make contributions to private pension plans to save for their retirement.

An umbrella company could take care of this very important aspect for contractors. The company handles all payroll functions, including paying over pension fund contributions to the contractor’s chosen pension fund. These contributions are usually structured as an employer’s contribution and paid over directly, making it easy and affordable for a contractor to have a pension fund of his or her own.

Related Blog Post: Final Salary Pension versus Money Purchase Pension

This is why it is highly beneficial for contractors to make use of an umbrella company such as www.crystalumbrella.com. Depending on the individual’s tax rate, he or she could end up spending only £51.46 for every £100 contributed to an approved pension fund. This is partly because the contribution is tax deductible, but also because it is exempt from employees and employers National Insurance deductions.

When choosing an umbrella company, it is very important to make sure that the company allows an employee to transfer his or her pension fund to another employer should the need arise in future.

You might also like reading An Attempt To Solve Problems Of Life With Simple Tips