Time is money when it comes to saving for your future.
It’s not just about how much you save for your pension, but when you start saving too. That’s because the earlier you start saving, the more time there is for your investments to grow.
Starting early also means you can save smaller amounts as over time they’ll grow with compounding.
How to Grow Your Pension with Compounding
Compounding means that you earn ‘interest on interest’ on what you save. As a result, when your pension is invested is over a longer time, you get more of that interest on your interest.
When you invest in shares you can receive dividends from that company. These are like the interest you earn on a savings account. Whilst dividends are never guaranteed, the longer you hold the shares, the greater the chance you’ve got to receive dividends from them.
Then if you invest those dividend payments into more buying more shares, you’re able to benefit from compounding. So with your dividends reinvested in this way, you can increase the size of your pension pot.
Also, in the past, shares have performed better than cash or bonds in the long term, although there are no guarantees of this for the future.
The Impact of Tax Relief on Your Pension
Another way that time can improve your pension is through tax relief.
That’s because when you pay into your pension the government gives you tax back. The sooner you start paying into your pension, the more tax that you’ll get back over time.
However, remember that taxes can change. So if rules on pension tax relief change in the future you may not be able to make up for past tax relief that you haven’t claimed. Check your own situation for how much tax relief you can claim back or get financial advice.
When to Check the Value of Your Pension
Birthdays often remind how long you have until retirement, especially those big milestones like 40, 50 or 60.
But you should look at your pension and investments regularly to check their value. Also as you get closer to retirement, check your pension more frequently. You’ll want to make sure that you’re on target to achieve the size of pension you need for retirement.
Is it Too Late to Start Saving for Your Pension?
If you’ve not yet retired, there’s still time to save for your pension. However, the later you start, the more you’ll need to save into your pension.
Check what pension income you expect to receive from your personal, workplace and state pensions to see if you have a shortfall.
If you do have a gap, take advice on how to make up that shortfall in your pension savings.
Please Note: The value of the investment can go down as well as up and you may not get back as much as you put in.
If you would like to speak to us about advice for your pension or retirement plans please email us [email protected].
