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Pensions: when should I start one?

December 3rd, 2008 by jamie | Filed under Daily News, Money Management, Pensions, Saving.

A pension is a financial device, effectively a savings mechanism, which in theory is designed to pay for your retirement years. You pay into a fund during the years you earn, which builds the fund up to a level which is then released per month once you have retired and will continue to pay until you die.

And once you start a pension, the actuaries will have worked out for you on a regular basis what is required to keep the fund up to the level of pay-out you are expecting in your retirement. As many pension funds are big investors in stock markets, then pension funds, as a collective, can go up and down like a yo-yo. In principle, a long term investment, like a pension, should show substantial growth over the period of the pension policy’s life. And as for fund managers, stock markets do give better returns than simply collecting interest on a daily basis from a more reserved saving funds vehicle. But therein lies the rub. When markets collapse, so can the value of pension funds, so you might be thinking that retirement is looking very rosy indeed, and then find out that you might not be as well of as you thought.

So, a pension is a quite simple idea, but as with many financial tools in the modern world, it’s anything but straightforward. It used to be that most employees in the private sector would join a company pension. And the employee and employer would both make contributions to a fund. Then businesses decided that running pension funds was firstly rather expensive and secondly, a too time-consuming task. Thus the private pension was thrust into the lime light and people were told to make their own provisions.

Nowadays most companies either do not run their own pension schemes, or have closed their existing schemes to new employees, much to the chagrin of the workers and unions.

Even in the public sector, in which employees were compensated with lower wages than the private sector with extremely good pension provisions, the Government is now mooting the idea that things will have to change.

Basically, as we all live longer and people fight off diseases that would once kill at an earlier age, providing a pension is a very expensive business.

So, mostly, preparing for your retirement is up to you. And a basic principle of a pension is that the earlier you can afford to start one, the better, as it is cheaper to establish a useful fund over a long period of time.

It’s been estimated that if a man in his mid-twenties were to contribute £100 a month up until a retirement age of 60, his annual pension could be in the region of £1,000 per month. But if that same man started at 40, he would have to contribute nearer £300 and for a 50-year-old, £1,000 a month. So, it follows, the earlier you get started, the better.

As to how much, that usually depends on your personal circumstances and how much you can afford. In many early working careers there’s little money to spare and other things keep intruding, such as marriage and children. And this is why a popular way of saving for your retirement is to build a pension fund to make the final payment on an interest-only mortgage. This method is now more popular than endowments. 

But you can see from the above calculation of £100 a month returning £1,000 a month from a mid 20-year-old, you have to look at your wage packet, or salary slip, and think if you can mange that, as well as afford all the other things you want to do.

But don’t put it off; most people make retirement and you will need some provision for your later life.

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