If you’re going to Do One Thing for Talk Money Week, my top tip is to pay into a pension. Even if you start small, if you keep contributing, all those payments can add up to make a big difference.

Starting young can pay off

I started my pension at 23 and, nearly 30 years later, I’m so glad I did. My financial wellbeing has been turbocharged by making regular pension payments, and nabbing the free money on top from tax relief and employer contributions.

People say that life is what happens when you’re making other plans. I reckon retirement sneaks up in the same way. One minute I was new to the world of work, and retirement was so far off it seemed irrelevant. Thank goodness I signed on the dotted line. Because now, after a whirlwind of jobs, homes, a husband, couple of kids and a dog, I’ve somehow turned 50, and have stashed enough cash that I can start making plans for retirement. 

Think beyond your State Pension

Sure, the State Pension will be a big help. However, my State Pension is only due to kick in when I turn 67, and currently only pays £10,600 a year. As a financial journalist, I tried living on the equivalent of the State Pension for a week, and it was tough. Topping it up with my own pension savings means I can look forward to a more comfortable existence. I might even be able to escape the world of work earlier, as you can get hold of private pension money from the age of 55 (rising to 57 from 2028).

Mind the pension gender gap

Part of the reason I started my pension early was because my mum ended up with really rubbish pension provision. My mum is from a generation when the whole pension set up was based on married couples, where the wife was expected to benefit from her husband’s pension pot. 

So my mum paid less in National Insurance contributions – known as ‘small stamp’ or ‘married woman’s stamp’ – because it was assumed that women didn’t need such big pensions because they could live on their husband’s pension. My mum also cashed in her work pension from a limited teaching career pre-children, on the basis she’d benefit from my dad’s public sector pension. 

Spoiler alert: relying on your husband’s pensions doesn’t work so well if you get divorced.

Plus, when my sister and I started school, my mum started her own business. She therefore didn’t have an employer to set up a workplace pension, or pay in on her behalf.  Like many self-employed people, she focused on running her business and never got round to setting up a pension. 

My mother’s pension savings added up to a whole heap of not very much, and I was keen to avoid ending up in the same situation. 

Think about the long term gains

My mum therefore encouraged me (and for encouraged, read nagged) into starting a pension when I started my first proper job.

The biggest advantage of starting pension contributions young is time. You face many decades before retirement. That’s the reason the government is willing to offer us tax relief to save towards retirement – because we have to lock our money away for so long. 

Time acts as a rocket booster for your retirement savings, thanks to the joys of compound interest. When you pay into a pension, your contribution, plus any tax relief and money from your employer, will be invested in the stock market. Each year, it hopefully earns interest and dividends on top. As it’s inside a pension, any earnings are tax-free. 

Then rinse and repeat year after year – more contributions, more earnings and more earnings on the contributions and earnings you’ve already built up. 

Any growth might start off as a slog uphill on a bicycle. But over the years, compound interest puts the pedal to the metal, sending your pension pot accelerating upwards. Stock markets will rise and fall, so the growth may not be a smooth curve, but markets do tend to trend upwards over the long term.

Don’t underestimate the power of compound interest

The earlier you start contributing the better, as even small amounts can make a big difference when boosted by time.

Say I’d started saving £50 a month, including any tax top up and employer contributions, from 20, and kept it up for the next 40 years. Assuming 5% growth, I’d end up with a chunky pension pot of just over £74,000 by the age of 60.

Then say I waited until I was 40 to pay into a pension, but doubled my contributions to £100 a month. By the age of 60, I’d have paid in exactly the same amount. But at the same 5% growth, my pension savings would only hit just over £40,500. 

In practice, if you bump up your pension payments with any pay rises, you can stash even larger sums by retirement. I’ve also had times when I was earning next to nothing, when between jobs, on maternity leave and while my kids were very young. But I still tried to keep paying a bit into my pension. Even non taxpayers can put up to £2,880 a year into a pension, and get it topped up with tax relief to as much as £3,600.

Opting out can cost you in the long run

When times are tight, you may begrudge the pension payments taken off your pay slip by auto enrolment, which is when your employer automatically enters you into a workplace pension without you needing to ask to be part of it. Caught between a rock and a hard place, cost of living pressures may even force you to stop making pension contributions. I do get it. Scraping together enough for today’s bills can be far more pressing than the distant future. But if you can treat any pause as a temporary last resort, and restart pension payments as soon as possible, you’ll have much more chance of covering your bills in retirement. 

So, if you Do One Thing to improve your financial wellbeing, I’m banging the drum to encourage everyone to stash some cash in a pension. That way, one day you can stop work and still afford a retirement to look forward to.