What is a pension?
A pension is a long-term savings plan that lets you build up a pot of money to use for later life. It’s a great way to save because you can get tax relief from HMRC/the taxman on the money you pay in.
Just remember, a pension is designed for later life. You usually can’t access your pension until age 55 (rising to 57 in 2028). Like any investments, the value of your pension can rise and fall. You could get back less than you put in.
Keep in mind, this article can provide you with handy tips, but it isn’t personal advice. If you’re not sure if something is right for you, you can get independent financial advice through Unbiased Link opens in a new window.
When’s the best time to start a pension?
The short answer is, the earlier the better.
And here’s why:
- Starting a pension when you’re younger gives you more time to pay money in while you’re earning an income.
- You’re unlikely to stay at the same income level all your life. As you spend more time in work, your income is likely to increase. Those small increases can also benefit your pension, if your contributions to your pension increase too.
- The money you’ve invested has longer to grow. When you invest for longer, you’re more likely to smooth out the bumps in the market.
- Your pension will benefit from compounding. Compounding can be a little difficult to wrap your head around. But essentially, compounding is when you earn money not only on the original amount you invest, but also on any income or growth you’ve earned on that. When your pension is left invested for longer, the more and more compounding it benefits from.
To find out how much you could put into your pension and what it could be worth, check out our pension calculator.
What difference will it make if I wait for a few years?
Here’s an example of how starting early can make a big difference to your pension pot. This example was produced by using a Virgin Money Pension calculator. Other providers may produce different results.
Sam’s 25. She’s been working for a few years and is thinking about saving for the future. She’s been considering whether to start a pension now or wait a few years when she’s earning more.
Sam wasn’t sure what to do so she tried our pension calculator to find out what difference it could make if she started saving now vs leaving it until later. The results surprised her.
Pension pot value and annual retirement income
Potential difference in pension pot value by age 60, if Sam delays by five years:
If Sam starts saving at 25 years, she'll retire with £331,442
If Sam starts saving at 30 years, she’ll retire with £248,970
Potential difference of £82,472
If Sam starts saving at 25 years, she'll retire with £331,442
If Sam starts saving at 30 years, she’ll retire with £248,970
Potential difference of £82,472
This would equate to the following difference in annual retirement income for Sam:
If Sam starts saving at 25 years, she'll have a potential annual income before tax: £17,072 pa.
If Sam starts saving at 30 years, she'll have a potential annual income before tax: £13,058 pa.
Potential difference of: £4,014 pa.
If Sam starts saving at 25 years, she'll have a potential annual income before tax: £17,072 pa.
If Sam starts saving at 30 years, she'll have a potential annual income before tax: £13,058 pa.
Potential difference of: £4,014 pa.
Sam's next steps
Sam decides to invest sooner rather than later and opens a pension. She likes the idea of not having to pick funds or worry about managing her pension once she’s invested.
In the early days her pension is invested with slightly more risk, but with the potential for higher returns. As she gets closer to retirement, this changes to a more defensive approach.
The idea is to try to protect her money, rather than to generate big returns, when she’s ready to access her pension in later life.
How much could your pension be worth?
Sam’s just an example of what a pension could look like. And what it could be worth in the future. But there are no guarantees, and your own circumstances will be different to Sam’s. Make sure you’re making the right decisions for you.
Your pension is designed for later life. When you save into a pension, the value of your investment could fall as well as rise and you could get back less money than you put in. You usually can’t access your pension until age 55 (rising to 57 from 6 April 2028). Tax rules can change and depend on your personal circumstances.
This article can give you helpful tips, but it isn’t financial, or tax advice. If you’re not sure if something is right for you, you should speak to an Independent Financial Adviser.
How we made this calculation
Close ModalHow we did the sums
To create this prediction for Sam, we made a few assumptions:
- She’d be paying in £300 per month.
- She’d pay in until she was age 60.
- We added the amount she’d pay in and the tax relief together, from age 25 to 60.
- We then did the same from age 30 to 60.
Sam invests in a Virgin Money Navigator Pension that steers your pension for retirement, choosing the investment mix based on your age.
If Sam starts saving now when she’s 25, she could have £331,442 in her pension pot at age 60. We’d estimate this could give her an annual retirement income of £17,072 (before tax).
If Sam puts off starting her pension by just five years until she’s 30, she could have £248,970 at age 60. That’s a huge drop of £82,472 and could reduce her annual retirement income to £13,058 (before tax).
In this scenario, to get the same amount of money in her pension pot, Sam would need to save more or delay taking an income from her pension – or both.
These figures were last updated on 22 August 2023.
Tax relief makes a big difference
Basic rate tax relief is added to everyone’s pension automatically by HM Revenue & Customs (HMRC). For Sam this adds a further £75 per month to the £300 that she pays in (to make the sums easier, we assume the rate of tax relief stays the same as it is today).
If Sam gets a promotion or a pay rise, she might move up to a higher tax bracket. That means she could claim extra tax relief, but it won’t be added to her pension automatically. She’ll have to apply for it herself on her self-assessment tax return.
To keep things simple, we don’t limit the payments Sam makes (or tax she’ll receive) for HMRC Annual Allowance limits. But it’s really important to know that limits might apply and these could change in the future. Details can be found at gov.uk.
Pension performance
We’ve considered past performance when estimating possible outcomes for Sam’s pension performance, alongside the assumptions noted above, and allowed for different market performance. In the graphs, we’ve taken the estimate from the middle of the range – but she could get more or less when she retires.
Take a look at our Navigator calculator to see how different market conditions can affect pension outcomes.
Inflation
We’ve shown Sam’s pension pot and annual income in today’s money, after allowing for inflation. We have to consider lots of different possibilities for inflation, rather than a single fixed % because the rate of inflation can rise and fall over time. Inflation reduces the value of what you can buy in the future as well as the value of your savings.
Charges
Sam's estimates after our charges have been taken out. There are two charges, the Account Charge and Annual Management Charge – and we’ve assumed they’ll stay the same as they are today.
Annual pension income
Sam’s estimated annual income assumes she uses her pension pot to buy an annuity. This gives her a fixed income for the rest of her life (but will pay out for at least five years) – however, she can’t pass it on to her spouse or civil partner when she dies.
Her income will remain at the same, fixed level for the rest of her life. So it will buy less over time if prices rise. She may have to pay tax on the income too – we’ve shown the before-tax figure to keep things simple.
Nice round numbers
We’ve rounded the numbers down a bit to make them easy to read.