The Lowdown on Pensions: A Guide for Gen Z
We enjoy working with people of all ages. One of our recent new clients Miranda Parkinson, is in her 20’s and is a creative writer specialising in media. Having worked with her to establish her investment objectives we asked her to share her perspective on Pensions and whether she feels this is something that resonates for her and her peers. She’s based in London and currently looking for her next position in content creation and writing. Here are Miranda’s thoughts which you may wish to share with young members of your own family.
The Lowdown on Pensions: A Guide for Gen Z Pensions
You heard your parents talking about them once. You’ve got a friend of a friend with a fancy job who’s already started putting heaps of money into theirs – probably. You vaguely remember a teacher mentioning them at school…
…but you’re still not entirely sure what they are.
Never fear – you’ve come to the right place. We’re going to give you the lowdown on pensions, from how to get one and who exactly pays into it to why it’s so important to suss it out early.
Simply put, a pension is a special type of savings account where you put money to be used when you retire. Everything you put into a pension is invested over years so when you get around to using it, it’s had plenty of time to grow.
But how exactly do you start one? In the UK, you’re automatically enrolled into a pension once you’re 22 and earning at least £10,000 a year. Your employer is required to enter you into a pension scheme and contribute at least 3% of your salary. The type of scheme and how much your employer pays will differ – but your employer will fill you in on that.
As well as your own pension, there’s the state pension – money that the government gives you. At the moment, the basic state pension is £134.25 a week and this kicks in when you reach the current retirement age, 66. Without your own personal pension, this money would have to cover accommodation, bills, food and any other living costs you might have.
And here’s the bad news: this is going to change. As of April 2028, the state pension age will be 68 years old, so there’s really no telling what it will be in the future. The age of retirement will increase and the state pension might get lower – or at some stage in the future it might not even exist!
But it’s not all doom and gloom. The younger you start investing in a pension, the bigger the rewards are going to be. One of the main benefits of putting money in early is the effect of compound growth. Let’s say we decide to invest £100,000. If there was growth of 5% next year, it would be worth £105,000. Then, if there was 5% growth the year after that, it would be on this larger amount. This means our money would increase to £110,250…and so on. Even investing small amounts has a powerful effect over time.
Research has traditionally shown that young people are the least likely age group to save money and for many, the idea of putting money away can seem really daunting – especially in something like a pension, where you can’t get at it until you are much older or retire.
If you don’t feel ready to start investing in a pension, opening a LISA is a good alternative. This is a new type of ISA (individual savings account – the L stands for lifetime) created by the government that gives you a bonus of 25% on everything you put in. This can be up to £4,000 a year and all you have to do is open one before you’re 40. Like a pension, delaying opening one could actually lose you money in the long run!
Although we probably won’t be earning much when we start working, investing a small amount gives it more time to grow and it’ll seem much less painful! Instead of having to invest something like 20% down the line, you could invest 5% over a longer period – and thanks to our friend compound growth, you’ll end up saving more.
A healthier bank balance and a growing pension pot? Sign me up!