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Pensions – make the most of your youth

Make the most of the early years and maximise from the power of compounding

Retirement might seem a long way off, so it’s easy to understand why saving for retirement isn’t a priority in your 20s – a decade when advancing your career, not planning for the end of it, seems more important. But, youth is a huge advantage when it comes to building wealth for retirement because it gives you time to maximise from the power of compounding.

As soon as you start working, it’s time to start thinking about pension and retirement planning. 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? You can probably find plenty of reasons not to save money. But, making the most of the early years of your career is one way to achieving your retirement savings goal, and probably the easiest.

Boost your contributions

It’s important to plan for the day that you eventually stop working as soon as you can. While you can’t usually touch the money in your personal or workplace pension until you reach the age of 55 (rising to 57 by 2028), 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.
You’ll receive tax relief at the basic rate of 20% on contributions made to personal and workplace pensions. So, for every £80 you pay in, the taxman 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. If you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

Valuable company benefits

Company pension schemes often provide one of the best ways to save for retirement, as employers also usually 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.

Enhance retirement savings

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. Pensions aren’t the only way you can save for your financial future. Some people choose to use their Individual Savings Account (ISA) allowance (which is currently £20,000 in the 2018/19 tax year) to enhance 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. It is now 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, you need to consider 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.

Tax-efficient returns

All gains and returns are tax-efficient with both ISAs and pensions, but once you’ve take 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. Over the long term, investment ISAs may provide the potential for greater returns than cash accounts.
In April 2017, the new 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, which will be supplemented by a government bonus of 25% (up to a maximum of £1,000 a year) up until age 50.

Government bonus, interest or growth

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-efficiently 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 LISA, you can only pay in up to £4,000.

Guiding you through the opportunities and challenges

Living for another thirty years after work isn’t just a possibility, it’s a probability. Maintaining your lifestyle for longer may mean changing your habits and having a smarter plan. Whatever stage of life you’re at, we can guide you through the opportunities and challenges you face. To find out more, please contact us.


A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pensions are not normally accessible until age 55. Your pension income could also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future. The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not a reliable indicator of future performance.

Wealth Management
Posted by Matthew Bromley
25th February, 2019
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