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Dan writes: I am 27 and have worked since I graduated in 2021 in relatively junior journalism and PR jobs. My average salary across that time has been about £35,000 and I’ve always contributed to a pension – I’ve never opted out. At the same time, the amount I’ve paid in has always been the minimum, so the pot I’ve got totals only around £13,000.
This feels small, and when I’ve googled it, this seems to confirm that. I obviously want a good retirement but at the same time, it’s 40 years away at least and I also rent, so my priority has to be buying a house.
I save around £200 per month at the moment which goes into a lifetime ISA, but would I be better upping my pension contributions instead? Do I actually need to go above the minimum at my age, or would I be better doing it once I’ve bought a flat?
Callum Mason, The i Paper’s Deputy Money Editor, responds: After reading your email in full, the first thing to address here is whether the sum is actually that small.
I know you have said your googling suggests that it is, but it needs the context of your age.
Research from Charles Stanley – the investment management firm – suggests that in their 60s, the average man has £79,300 saved into a pension, but for people in their 20s, it’s actually only £5,500, so far smaller than what you have saved.
Obviously, as people get older they tend to earn more, which means they put more into a pension, but their pension also grows because the money has been invested for longer.
Over time, growth compounds, so they get a bigger and bigger retirement pot and yours will follow a similar path – especially if you keep saving.
Now, let’s address the amount you are saving. Under auto-enrolment rules, employees automatically contribute 5 per cent of their qualifying earnings into a pension with their employer topping up an extra 3 per cent.
This is the amount you are paying in. It’s good that you are paying in but some pension firms tend to suggest increasing this a little if you want a good standard of living in retirement.
Lots of pension firms suggest trying to get 12-15 per cent of earnings into a pension – but this includes employer contribution too.
I asked Andrew Prosser, chartered financial analyst at InvestEngine, how you could try and get a bigger pension pot.
He said the biggest thing to check is how your workplace pension works – specifically whether your employer offers additional matching. In other words, do they pay in more to your pension if you increase your contributions?
He said it’s worth finding out what the maximum employer match is under your scheme.
“If extra matching is on the table, increasing your pension contributions up to that matched maximum is usually a no-brainer, because you’re effectively receiving free money from your employer as well as tax relief on your contributions,” he explained.
You looked into this, and your employer sadly does not offer any matching, though it’s worth noting for other readers.
Prosser said that given your employer just pays a fixed minimum and it doesn’t increase payments when you do, then putting extra money into your pension versus a lifetime ISA (Lisa) becomes “more of a personal trade-off”.
Let’s have a look at how the Lisa works to start with.
People can set up a Lisa between 18 and their 40th birthday. They can pay up to £4,000 a year into their account up to age 50 and receive a 25 per cent government bonus on top (meaning a maximum government bonus of £1,000 a year).
But if they take the money out before age 60, other than for a qualifying house deposit (to buy a first home under £450,000) then there is a 25 per cent withdrawal penalty, which claws back the government bonus as well as 6.25 per cent of an account holder’s own money.
After 60, the money can also be taken for retirement – but more people use the product to save for a home, as you are doing.
There are potential reforms to the Lisa coming in the future, though we don’t know what these will be yet.
Prosser has pointed out that for you you don’t need to choose all pension or all deposit.
“A sensible balance is to remain in the workplace pension at least for the full employer contribution, topping up to the maximum match if it’s available, and continue building your deposit through the Lisa – as long as the £450,000 cap works for where you’re buying,” he explains.
He also points out it’s worth making sure you keep at least a basic emergency buffer in an easy-access account, so a surprise bill doesn’t force you to raid the Lisa and take the hit, or have to take on expensive borrowing.
Once you’ve bought, you can then start prioritising your pension and you could still have decades to build your retirement fund.
Prosser says at this stage you could allocate part of each pay rise to higher pension contributions.
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“Starting earlier does help, but it’s also completely normal to prioritise a house deposit in your 20s and then increase pension saving in your 30s,” he says.
Overall, the biggest message to you seems to be that you are thinking about all the right things – and if you continue to be this engaged, you’re likely on track to hit your financial goals.
Best of luck with your saving!
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