How to handle your pension, decade by decade

When should you start sav­ing for your pen­sion – and how can you get the best pos­si­ble results? While such ques­tions plague us all, the answers can vary depend­ing on your age.

For those who are younger, sav­ing for a pen­sion can seem like an impos­si­bly dis­tant con­cept, one that they often put off until lat­er life. It’s also, cru­cial­ly, an attempt to hit a mov­ing tar­get, with the state pen­sion age con­stant­ly shift­ing back and forth depend­ing on the gov­ern­ment in pow­er and the country’s finances.

For the mid­dle aged, pen­sions can become an obses­sion. While it could spur dreams of an ear­ly retire­ment, it can also be the source of seri­ous headaches, as jug­gling life’s out­go­ings com­petes with the urge to save for a rainy day. And for those near­ing retire­ment age, it can be a moment of bliss or sheer pan­ic, depend­ing on the size of your pot.

Some parts of the future aren’t fore­see­able. We know that the bal­ly­hooed pen­sion age rise in 2028 will have a mate­r­i­al effect on many of us, but for those in their teenage years, retire­ment is a long time away, with plen­ty of chance for changes. But to find out what you should be doing now based on what we think the future holds, we’ve asked the experts.

Pensions advice for under-20s

It can be dif­fi­cult to get teenagers to care about tomor­row, nev­er mind 60 years from now. But if you can encour­age them to look to the future, con­vince them to think about sav­ing. And if you can’t get them to care, then go about it your­self.

Teenagers of 13–17 years old are at a prime age to begin think­ing about future sav­ings, says Emma-Lou Mont­gomery, asso­ciate direc­tor at Fideli­ty Inter­na­tion­al. “For this younger group, it’s more about ensur­ing they have a broad idea about what they want their future to look like,” Mont­gomery says. 

Ask them about the future career they might they like to pur­sue, or mile­stones they’d like to achieve in adult­hood. “Set­ting these goals and instill­ing healthy sav­ing habits is a great way to boost con­fi­dence and improve their finan­cial aware­ness and under­stand­ing of basic pen­sions sav­ing, invest­ments and mon­ey man­age­ment.”

The bank of mum and dad can help, too – if there’s mon­ey spare. “For par­ents, a Junior ISA is a tax-effi­cient way to help start off your child’s future sav­ings as you pay no income tax or cap­i­tal gains tax on your invest­ments. Once your child reach­es 18, they can access the mon­ey in their Junior ISA and decide how they want to spend or rein­vest it for the future.”

Once some­one enters the world of work, it’s impor­tant to get into an employer’s pen­sion scheme, says Vic­to­ria Ross, char­tered finan­cial plan­ner at Prog­e­ny. This helps them ben­e­fit from any con­tri­bu­tions that employ­ers are oblig­at­ed to pay. 

“Auto enrol­ment only applies to those aged 22-plus and if you earn over £10,000 per annum, so under that age and income you may have to opt in,” she warns. Those earn­ing more than £520 per month in the scheme have a min­i­mum con­tri­bu­tion of 8%, 3% of which is met by the employ­er – though some offer to do more. “Check if your employ­er will match your high­er con­tri­bu­tions as this is the eas­i­est way to boost your sav­ings,” says Ross.

20s: start saving early

The age-old advice still stands: when it comes to set­ting up your pen­sion plan, the ear­li­er the bet­ter. “The com­pound ben­e­fit of reg­u­lar sav­ing over time is vital to build­ing up wealth,” says Roy Thomp­son, head of finan­cial advis­ers at accoun­tan­cy firm Car­pen­ter Box. As with those aged under 20, employ­ees should ask to opt-in to a work scheme and see if you can for­go some lux­u­ries to max­imise con­tri­bu­tions.

If you’re self-employed, like an increas­ing num­ber of peo­ple in this age group, you should still con­sid­er a pri­vate pen­sion con­tri­bu­tion. It’s impor­tant to get into the habit of putting aside mon­ey for lat­er. 

“Sav­ing for the future while in your twen­ties may feel par­tic­u­lar­ly tough in the cur­rent cli­mate, with house­hold bills, rent pay­ments and gen­er­al day-to-day costs all going up,” says Mont­gomery. “But that doesn’t mean it’s any less impor­tant. What you do now will hold great bear­ing on your future, so it’s about think­ing clev­er­ly about how you can nav­i­gate how much mon­ey you need for day-to-day spend­ing while work­ing towards your future.”

Take, for instance, some­one invest­ing £100 a month into a pen­sion pot from the age of 25. By the time they reach retire­ment, they’ll have saved £48,000 for their pen­sion. You could achieve the same base amount of mon­ey by start­ing to save 20 years lat­er, at the age of 45, and putting in £200 a month. But com­pound inter­est would mean the 25-year-old’s pen­sion pot would be near­ly twice as big, assum­ing a 5% annu­al return. 

The com­pound ben­e­fit of reg­u­lar sav­ing over time is vital to build­ing up wealth

“Younger peo­ple have the pow­er of com­pound­ing, where­as those 40 or 50 year olds don’t have time any more,” says Zoe Dag­less, finan­cial plan­ner at Van­guard UK. “As much as they think it might not be that much, that will get them a long way when they are 60 or 65 com­pared to start­ing that plan­ning aged 40.”

A stocks and shares ISA can be set up with con­tri­bu­tions as low as £25 a month and a ceil­ing of £20,000 tax-free per year. “By putting away a small amount each month you can soon build up a sub­stan­tial pot,” says Mont­gomery. That’s espe­cial­ly true in the cur­rent cli­mate, where the stock mar­ket is on a post-pan­dem­ic upswing. 

The same atti­tude that may make peo­ple in this decade ret­i­cent to even think about pen­sions could poten­tial­ly help them embrace slight­ly high­er risk invest­ment options: if mar­kets col­lapse, you’ve still got 30 years or more of your work­ing life to rebuild your pen­sion pot. Dag­less rec­om­mends try­ing to put away cash while not look­ing too close­ly at the dips, if some­one is wor­ried about loss­es. In the long run, they’re still like­ly to ben­e­fit.

How­ev­er, don’t throw cau­tion to the wind. Think­ing about your atti­tude to risk at this age is key. “His­to­ry sug­gests that a high­er invest­ment risk would be reward­ed over the long term, although this is not guar­an­teed or suit­able for every­one,” says Thomp­son. “Younger indi­vid­u­als should engage with invest­ment risk and edu­cate them­selves on it.”

30s: growing your pension pot

If you’ve put in place a smart strat­e­gy to build up your pen­sion pot, this decade is where things should real­ly start to build up steam. Work­ers may well have switched jobs mul­ti­ple times by this point of their work­ing life and accu­mu­lat­ed a col­lec­tion of dif­fer­ent pen­sion plans from employ­ers. You should think about amal­ga­mat­ing pen­sion plans into a sin­gle col­lec­tion to reduce the admin­is­tra­tive bur­den and paper­work involved. But be care­ful – some plans will charge you to move your mon­ey, which can coun­ter­act any ben­e­fits, says Thomp­son.

For those lucky enough to have built up a high salary by this age, pen­sion con­tri­bu­tions can become a tax-eas­ing strat­e­gy. If you’re earn­ing more than £50,271 a year, you’re cur­rent­ly in the high­est tax band. Con­tribut­ing to a pen­sion could help you get tax relief of up to 40%. If you’re bring­ing in more than £100,000 a year, you could lose your first £12,570 of per­son­al allowance of tax-free income. “Pen­sion con­tri­bu­tions can poten­tial­ly help retain this by bring­ing your tax­able income back down to £100,000,” says Ross.

Think clev­er­ly about how you can nav­i­gate how much mon­ey you need for day-to-day spend­ing while work­ing towards your future

Your thir­ties are also like­ly a time when you’ll be think­ing about big life deci­sions, includ­ing poten­tial­ly start­ing a fam­i­ly. “This is the most dif­fi­cult time of life,” says Dag­less. “You’ve got mort­gage pres­sures, fam­i­ly pres­sures, every­thing.” Parental leave and the addi­tion­al cost of rear­ing a child can make your pen­sion con­tri­bu­tions slight­ly hap­haz­ard. 

“There are steps you can take to ensure any time you take away from work doesn’t adverse­ly affect your future retire­ment sav­ings,” says Mont­gomery. “For exam­ple, choos­ing to pay in extra in the run up to your leave, encour­ag­ing your part­ner to pay into your pen­sion while you aren’t earn­ing, or mak­ing use of the ‘Car­ry For­ward’ rules once you’re back in work.”

What­ev­er you do, make sure you don’t lose track of the impor­tance of your pen­sion. With so many com­pet­ing inter­ests, it can be very easy to allow plan­ning for the future to take a back seat. But giv­en aver­age life expectan­cies, those cur­rent­ly in their 30s are like­ly to have 20 or more years in retire­ment, which means sav­ing up plen­ty to ensure your stan­dard of life doesn’t take a big hit when you leave the world of work.

40s: shifting your pension strategy 

Those in their for­ties shouldn’t nec­es­sar­i­ly pur­sue the same strate­gies that worked for them in the pre­vi­ous two decades of work. At this point in their lives, their goals for their pen­sion are like­ly to be sig­nif­i­cant­ly dif­fer­ent than in pri­or decades, demand­ing a dif­fer­ent approach. 

Mont­gomery advis­es think­ing about self-invest­ed per­son­al pen­sions (SIPPs) to super­charge sav­ing towards your retire­ment. Open­ing one is sim­ple, and you can drip-feed invest­ments into it from as lit­tle as £20 a month. “With a SIPP you choose where your mon­ey is invest­ed, giv­ing you con­trol over your pen­sion,” she says. “You might also be able to trans­fer exist­ing pen­sions you have into the SIPP, mak­ing it eas­i­er to see how your retire­ment sav­ings are grow­ing.”

High­er earn­ers will want to be cau­tious at this age, tak­ing stock of their pen­sion plans and ensur­ing they don’t get close to their life­time allowance of £1,073,100 in pen­sion sav­ings. Any­thing above that amount could be sub­ject to sig­nif­i­cant tax­a­tion upon retire­ment, dimin­ish­ing all the hard work you’ve put into sav­ing over the years when you want the mon­ey most. 

“If you’re in this sit­u­a­tion you can also look at ‘pro­tec­tion’ options which, even though restrict­ed, will essen­tial­ly give you your own life­time allowance,” advis­es Mont­gomery. So-called tax effi­cient wrap­pers – which insu­late your cash from hav­ing tax tak­en off, such as ISAs or pen­sion con­tri­bu­tions – can become more ben­e­fi­cial at this age for high­er earn­ers or those with a sig­nif­i­cant pen­sion pot already saved up, says Ross, who sug­gests seek­ing finan­cial advice for the best pos­si­ble strat­e­gy. 

Your for­ties are also the time to start mak­ing big deci­sions. Think­ing about your retire­ment goals in this decade is cru­cial, says Thomp­son. When do you want to stop work­ing? What kind of life do you want in your retire­ment? Are you look­ing for a qui­et time or a nev­er-end­ing parade of round-the-world cruis­es? The answers to all these ques­tions can help pin­point what kind of income you’ll need when it comes time to leave the world of work. 

“By look­ing at what sav­ings an indi­vid­ual already has, a cohe­sive sav­ings plan can be put togeth­er look­ing at the suit­able lev­el of risk for invest­ments as indi­vid­u­als move toward retire­ment and a quan­tum of pen­sion pay­ments to build the required sum,” he says.

50s: preparing for retirement

This decade is one to tie up loose ends and ensure things are steady as they go. Any risky bets made in your 20s or 30s should now be unwound and made safer. “They are approach­ing a point in time that they will be reliant on pen­sion assets to deliv­er an income,” says Thomp­son. It’s not the time for big bets that can go wrong. 

It’s also worth con­sol­i­dat­ing pen­sion plans in much the same way as those in their 30s. “Lega­cy pen­sions may not be appro­pri­ate­ly invest­ed or at a suit­able cost and a con­sol­i­da­tion exer­cise could be ben­e­fi­cial,” says Ross. 

There’s also the big ques­tion of when or if to take a lump sum from your state pen­sion; this is cur­rent­ly avail­able to peo­ple at the age of 55, but it will soon rise to 57. Before doing so, it’s impor­tant to audit what you’re like­ly to get from your state pen­sion. If there are any short­falls that could scup­per your plans and give you a small­er sum than expect­ed, see if mak­ing addi­tion­al con­tri­bu­tions can help fill the gap. But be con­scious that there’s only so much you can do at this stage, says Thomp­son. 

“Hav­ing an under­stand­ing around how pen­sion ben­e­fits can be tak­en is essen­tial. There are now a range of options and there is no sil­ver bul­let.”

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