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Lifetime Savings – an article for DWF Link early careers network

28 September 2022

June Crombie, Pensions Partner at DWF discusses the importance of contributing to your pension and provides guidance on this in terms of lifetime savings options. 

You, "free money" and the power of compound interest.

Not the catchiest first line I know but I reckoned workplace pensions aka lifetime savings and why the earlier you start saving in your employer's workplace pension scheme and then keep on doing so the better is less compelling, so please do read on. 

When asked the question what was the greatest human invention? Albert Einstein's reply was - compound interest.  

Warren Buffett is also a supporter, calling compound interest an "investor's best friend". 

A clear example of compound interest at work is in workplace pensions where the savings build up over many years to provide money later in life. That is what it is designed to do. 
So, "free money" in the form of contributions paid by your employer into your workplace pension scheme, plus your own contributions, and then the application of compound interest delivers long-term growth. 

You may find it helpful with your planning and decisions to look at the PLSA Retirement Living Standards.  Based on research, these standards show what life in retirement could look like at three different levels and what a range of common goods and services would cost for each level. The categories are housing, food and drink, transport, holidays and leisure, clothing and personal and helping others.  The standards set out current estimates of what level of annual income is required to deliver each of the three types of lifestyle – minimal, moderate and comfortable.  

Start lifetime savings by joining your employer's workplace pension scheme and try not to opt out.  If you do opt out – aim to opt back in if you can, as soon as you can.  Remember your employer's pension contributions are "free money".

Times are tough. Recent research in the UK by the professional services consultancy, Barnett Waddingham , identified that 18% of 18-24 year olds (and 7% of pensions savers overall)  in workplace pension schemes were planning to reduce pension contributions due to the cost of living crisis. You will be looking at your priorities and managing your money and expenses.  This may include your workplace pension scheme, if you have the choice whether to keep paying in at the same level, reduce contributions or to opt out.   

Where pension saving is not mandatory, depending on the type of pension scheme you are in you may have the option to reduce your contributions or you may only have the choice to opt out altogether.  If you opt out then you lose the free "money" and benefit of compound interest on the contributions that would have gone into the scheme. Investment platform provider AJ Bell has reported that based on analysis carried out, that a 30-year-old who pauses contributions for 3 years could end up with a fund £25,000 smaller at state pension age.   

In the UK, opting out of your employer's pension scheme will mean you lose out on "free money" equivalent to at least 3% of a band of your pay (usually known as pensionable pay) going into savings for you each month plus your own contributions going into your saving pot.  These savings are building up tax-free.  This is where the compound interest point comes in, the earlier you start the build-up the better.  

In the UK, currently tax relief is available on your pension contributions too up to certain limits.

You should be clear what your options are and the consequences, including whether you can re-join the pension scheme you left, before you take any decisions or actions.  You may not be able to re-join the same scheme if you are currently a member of a scheme that offers benefits above the statutory minimum. Your employer and the pension scheme provider will be able to tell you.
If you still feel you have no option but to opt out for a while and you can re-join, try to plan when you can re-join.  In the UK, you can ask to re-join your employer's auto enrolment scheme provided you meet the qualifying conditions under the auto enrolment regime set up by law. 

Through your employer and pension scheme provider, you should have access to information about your workplace pension.  Take any opportunity you have to find out more and to ask questions – your employer will be pleased that you are engaging with them on your pension. 

What I have said in this blog is not in any way financial advice and your employer will not be in a position to give you that either.  Any financial advice should take into account your own personal financial situation and other relevant information that is where an independent financial adviser (who does not only advise on the financial products from one or a limited number of companies) who takes into account your own personal situation can provide financial advice to you. You would appoint your own independent financial adviser.  

I hope that this is of some help when thinking about your priorities.  You will always have competing priorities but when thinking about how you manage your money and expenses, remember to factor in "free money" and compound interest and what you will be losing if you reduce contributions (if you can) or leave your employer's pension scheme. 

Disclaimer: Any content above in relation to pension's schemes is based on the UK position and pension laws and framework can differ in each country.

Further Reading