Half of all UK adults reported an increase in their cost of living last year. Worse still, the Office for Budget Responsibility (OBR) projects the disposable income of the average Briton will drop a further 1.5% per head throughout 2024. While covering your outgoings is essential, Mark Norman explains why ignoring your pension contributions at a young age is an especially high-risk decision.

With energy costs having gone up a further 5% in January and inflation holding steady at 5.25%, many UK taxpayers are understandably worried about their increasing outgoings. For young working people, this is especially true.

While navigating your current circumstances is crucial, you can’t overlook planning for your future financial security, and one of the most effective ways to achieve this is by contributing to your pension from a young age. Of course, it may be tempting to prioritise short-term disposable income, but the long-term benefits of early pension contributions cannot be overstated. 

Read on to explore five key reasons why paying into your pension while you’re young is a smart financial move that will pay dividends in later life.

Harness the power of compound interest

One of the most compelling reasons to start contributing to your pension early is the magic of compound interest. By investing your money at a young age, you give it more time to grow exponentially. 

Compound interest allows your money to generate additional earnings, creating a snowball effect that significantly boosts your pension fund over time. The earlier you start, the more your money works for you. 

In fact, compounding returns are further increased by the tax reliefs available. For every £100 an individual pays into their pension, they receive a £25 top up from the tax man – and then, at retirement, they are only taxed on 75% of the total fund (below lifetime allowance level).

What’s more, if your employer pays directly (via salary sacrifice), then you save on National insurance contributions as well.

Take advantage of automatic enrolment 

Automatic enrolment has been in place since October 2012. This means that young people now become eligible to pay into a workplace pension scheme from the age of 18. This process happens (as the name suggests) automatically – meaning that you have to make a conscious effort to opt-out.

I would strongly advise against doing so, as automatic enrolment presents a golden opportunity to kickstart your pension savings effortlessly. By staying in the programme, you lay the foundation for a secure financial future without the need for complex processes or significant effort on your part. Your employer also pays in a proportionate amount based on your contributions – so, if anything, I would advise paying the higher 10% salary sacrifice now to more than double your earnings down the line.

Build a solid financial foundation

Starting your pension contributions early gives you a keen advantage against your peers who don’t, as you’ll be regularly adding to your future financial safety net. Inevitably, as you progress in your career, life’s unavoidable twists and turns will rear their head. 

There will be times when your expenses are higher and income perhaps lower, but the journey to financial wellbeing becomes more manageable when you have a well-funded pension. This financial security not only provides peace of mind but also gives you the freedom to pursue opportunities without the constant worry about your long-term financial well-being.

Mitigate the impact of inflation

Inflation erodes the purchasing power of your money over time. We’ve all been reminded lately of just how powerful the effects of inflation are – so why not use it to your advantage?

By contributing to your pension early and consistently, you can help to drastically minimise the impact of inflation on your retirement savings. The growth potential of your investments, combined with regular contributions, ensures that your pension fund keeps pace with or even outpaces inflation, maintaining its real value.

By starting early and staying committed, you are not only securing your future but also setting yourself up for a more financially stable and fulfilling retirement. 

For advice on how you can best grow your pension pot with specialist guidance and savvy investments, get in touch with our expert team of financial advisers today.