Why when you start paying into a pension plan matters

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When you’re prepping for life after work, it’s important to think about what you want your retirement to look like and how much you might need to fund it. And here’s the thing: when it comes to pension plans, when you start paying in matters. So let’s get into it.  

Why does when you pay in matter?

Usually, the earlier a person begins paying into a plan, the better.

Got a 'defined contribution' pension plan? This is a type of plan you can open yourself and pay into. Or your employer might set one up for you when you start a new job – in which case they normally pay in as well. So the younger you are when you start, the more payments you (and potentially your employer) will have made by the time you retire.

Pension plans also come with tax benefits. When some people pay into their plan, money they otherwise would’ve paid in tax on their payment gets added to their plan instead. And this can add up over the years. Depending on the type of plan you have, though, you might get tax benefits in a different way. You can find out more on MoneyHelper.

Finally, when money is paid into a pension plan, it gets invested. This means it has the opportunity to grow over time. But it’s important to remember that the value of your investments can go down as well as up and you could get back less than was paid in. 

Let’s look at some examples

Hannah’s just started her first full-time job. She’s 22, and her employer has set up a pension plan for her. She starts out with a yearly salary of £25,000 before tax. So her monthly salary is £2,083 before tax.

Let’s imagine Hannah starts paying into her pension plan from age 22. If she pays in 5% of her monthly salary each month and her employer pays 3% – and assuming Hannah’s salary goes up – she could have a total of £196,000* in her plan if she retires at 68. 

Now let’s picture this scenario instead. Hannah tells her employer she doesn’t want to pay into her plan and would rather ‘opt out’. So she doesn’t pay in anything, and her employer doesn’t either. When Hannah turns 30, she decides to start paying in, and her employer pays in too. Using the same calculations and the same retirement age, we’ve estimated Hannah could have a total of £159,000 in her pot – which is £37,000 less.

And what if Hannah and her employer don’t start paying in until she’s 40? She could have £114,000 in her pot at 68 – which is a big difference. 

It’s worth noting that we’ve assumed Hannah and her employer are paying in a percentage of her total salary. This won’t always happen – if you have a plan through your job, it might be the case that you and your employer pay in a percentage of a portion of your salary, known as your ‘qualifying earnings’. You can read about this, and the minimum you and your employer might have to pay in, on MoneyHelper.

If you’ve set up a pension plan yourself, your employer usually won’t pay in. But the principle is the same – the earlier you start paying into a plan, the more you could benefit.

Should you panic if you started paying in later?

As you can see from the examples, paying into a pension plan earlier can have a big impact on your pot size. Remember, though, many people work into their 60s. So even if you’re just starting to save for retirement in your 30s or 40s, don’t panic; you could still have more than two decades to try to reach your goals. 

Let’s go back to Hannah. Again, let’s imagine she and her employer don’t start paying into her plan until she’s 30. This time, though, Hannah pays in 8% of her monthly salary and her employer pays in 6% – what difference could that make? We’ve calculated that her pot would now be £278,000 if she retires at 68. 

And what if the percentages are the same (8% and 6%) but they don’t start until she’s 40? Hannah could have £200,000.

The key takeaway here is that the amount that’s paid into a pension plan is important – but so is the number of years the money is paid in for.

Don’t forget, you can claim your State Pension when you reach State Pension age, which is currently 66 but rising to 67 by 2028. This alone may not be enough to live on but, coupled with other forms of retirement savings you have, it could make a difference to your lifestyle.

How can I check if I’m on track for the life I want?

If you’re not sure how much you might need to fund your future, you can try using the tool on our Saving for retirement guide.

You could then take a look at our pension calculator, which can help you understand how much money you might have in the future.

It’s Pension Engagement Season 2024

We’re proud to sponsor Pension Engagement Season, which is all about getting people to pay their pension more attention. So use these three steps to invest some time in yourself and your pension today.