Why you're never too young to save for retirement

What you’ll learn:

• How you’ll be automatically enrolled into a company pension when you start work.
• Why pensions aren’t the only way you can save for retirement.
• Why diversification matters.

Bear in mind when planning that tax rules can change and their effects on you will depend on your individual circumstances. Take independent tax advice, if you’re unsure.

Why you can’t start saving for retirement soon enough

Think you’re too young to start a pension? Think you’ve got plenty of time before you need to plan your retirement? Think pensions are only for ‘older’ people? Think again.

Retirement may seem a long way off, but it’s worth financially planning for this as soon as you can – although investments carry risk and there's always the possibility that you could lose money or get back less than you invest.

While you can't usually touch the money in your personal or workplace pension until you reach the age of 55, one of the best aspects of pension saving is the boost your contributions receive from tax relief, or a refund of the tax you’ve paid (please note however, that the Government have announced an intention to link this to 10 years prior to the State Pension Age. If this passes into law, the minimum pension age will increase in the future).

You'll get tax relief at the basic rate of 20% on contributions made to personal and workplace pensions. So for every £80 you pay in, HM Revenue & Customs will top it up to £100. If you're a higher or additional rate taxpayer you can claim back up to an additional 20% or 25% through your self-assessment tax return.

It’s never too early to start thinking about pension and retirement planning. Here are some of the different ways you can save for your future.

Join your company's pension scheme

Company pension schemes often provide one of the best ways to save for retirement, as long as you make certain payments, employers are now compelled to also make contributions on your behalf. Given that the government tops up your contributions too through tax relief, boosting the amount in your pension pot, this makes them one of the most valuable company benefits available.

Under the government’s auto-enrolment scheme introduced in 2012, if you're at least 22 years old and earn more than £10,000 your employer will have to automatically enrol you in a pension scheme into which you and they must contribute. You can opt out if you want to but if you do this you won’t benefit from your employer’s contributions.

If you don’t have access to an employer’s pension scheme, perhaps because you're self-employed, you can still contribute to a personal pension and benefit from tax relief on your contributions.

If you’re confident about making your own investment decisions, then you might want to consider investing in a self-invested personal pension (SIPP).

With this type of personal pension, you have control over where your money is invested, and you'll also often have access to an even greater range of investments than standard personal pensions offer.

Although it's possible for a financial adviser to select the investments you hold within a SIPP, many people choose this type of pension because they have the desire and experience to go it alone and have time to monitor and research their investments.

Consider individual savings accounts (ISAs)

Pensions aren’t the only way you can save for your financial future. Many people choose to use their Individual Savings Account (ISA) allowance (£20,000 in the 2024-25 tax-year) to bolster their retirement savings.

Unlike pensions, there’s no tax relief on the money you put into ISAs, but you can access your savings whenever you like. Thanks to flexible ISA rules introduced in April 2016, it’s also possible to withdraw ISA funds and repay the contribution in the same tax year, without the replacement counting towards your annual ISA limit. However, bear in mind that while an ISA may be flexible, if you sell investments to withdraw cash, you may not get the best available returns, and could potentially increase the risk of loss compared to remaining invested over the long-term. Be aware of course, it’s also a fact that investments can go down as well as up, and you could get back less than you originally invested even if you hold them for a longer term.

All gains and returns are tax-free with both ISAs and pensions, but once you’ve taken the tax-free cash from your pension, the rest will be subject to income tax as you draw an income or lump sum. All withdrawals from ISAs are tax-free.

If you hold cash savings outside an ISA, basic rate taxpayers are entitled to a Personal Savings Allowance (PSA), which allows them to earn tax-free annual interest of up to £1,000 from bank or building society savings accounts and other investment income. Higher-rate taxpayers will get a £500 allowance but additional rate taxpayers won’t be entitled to any PSA.

Over the long term, investment ISAs may provide the potential for greater returns than cash accounts. Remember, however, that investments can fall as well as rise, which means there's a risk of getting back less than you invest. If you don't understand a financial product, get independent financial advice before you buy.

Take your investments up a notch

If you have several decades before you’re due to retire and a strong appetite for risk, adding something a little more ‘exotic’ to your portfolio might pay off in the long run, but you’ll need to accept you could lose some or all of your money, whether it’s in property, gold, or another alternative investment. However, putting money into a wide range of assets can help you diversify your portfolio.

The key, for those who are lucky enough to be younger and wiser, is to start small and build up gradually. Adding new savings and investments here and there to more traditional pension plans, also makes it more likely that, when retirement comes, you should have a decent income to live on.

Make the most of the lifetime ISA

In April 2017 the lifetime ISA (LISA) launched to encourage people aged under 40 to save for their first home or their retirement. You can save up to £4,000 a year from your ISA allowance into a LISA,¹ which will be supplemented by a government bonus of 25% (up to a maximum of £1,000 a year) up until age 50.

Funds held in a LISA can be used after 12 months of account opening to buy a first home valued up to £450,000. Alternatively, after your 60th birthday you’ll be able to take out all your savings from your LISA tax-free, for use in retirement. A LISA can be accessed like a normal ISA at any time for any reason, but if not used as above, you’ll lose the government bonus and any interest or growth on this. You'll also have to pay a 5% charge.

You can split your allowance between a cash, investment, innovative finance and a lifetime ISA if you want to and all gains will be free from income tax, tax on dividends and capital gains tax. However, with a lifetime ISA,¹ you can only pay in up to £4,000.

Find out more about lifetime ISAs