How to handle your pension, decade by decade

Whether you’re 16 or 60, what steps should you take to ensure the best possible retirement?


pension strategy

When should you start saving for your pension – and how can you get the best possible results? While such questions plague us all, the answers can vary depending on your age.

For those who are younger, saving for a pension can seem like an impossibly distant concept, one that they often put off until later life. It’s also, crucially, an attempt to hit a moving target, with the state pension age constantly shifting back and forth depending on the government in power and the country’s finances.

For the middle aged, pensions can become an obsession. While it could spur dreams of an early retirement, it can also be the source of serious headaches, as juggling life’s outgoings competes with the urge to save for a rainy day. And for those nearing retirement age, it can be a moment of bliss or sheer panic, depending on the size of your pot.

Some parts of the future aren’t foreseeable. We know that the ballyhooed pension age rise in 2028 will have a material effect on many of us, but for those in their teenage years, retirement is a long time away, with plenty of chance for changes. But to find out what you should be doing now based on what we think the future holds, we’ve asked the experts.

Pensions advice for under-20s

It can be difficult to get teenagers to care about tomorrow, never mind 60 years from now. But if you can encourage them to look to the future, convince them to think about saving. And if you can’t get them to care, then go about it yourself.

Teenagers of 13-17 years old are at a prime age to begin thinking about future savings, says Emma-Lou Montgomery, associate director at Fidelity International. “For this younger group, it’s more about ensuring they have a broad idea about what they want their future to look like,” Montgomery says. 

Ask them about the future career they might they like to pursue, or milestones they’d like to achieve in adulthood. “Setting these goals and instilling healthy saving habits is a great way to boost confidence and improve their financial awareness and understanding of basic pensions saving, investments and money management.”

The bank of mum and dad can help, too – if there’s money spare. “For parents, a Junior ISA is a tax-efficient way to help start off your child’s future savings as you pay no income tax or capital gains tax on your investments. Once your child reaches 18, they can access the money in their Junior ISA and decide how they want to spend or reinvest it for the future.”

Once someone enters the world of work, it’s important to get into an employer’s pension scheme, says Victoria Ross, chartered financial planner at Progeny. This helps them benefit from any contributions that employers are obligated to pay. 

“Auto enrolment only applies to those aged 22-plus and if you earn over £10,000 per annum, so under that age and income you may have to opt in,” she warns. Those earning more than £520 per month in the scheme have a minimum contribution of 8%, 3% of which is met by the employer – though some offer to do more. “Check if your employer will match your higher contributions as this is the easiest way to boost your savings,” says Ross.

20s: start saving early

The age-old advice still stands: when it comes to setting up your pension plan, the earlier the better. “The compound benefit of regular saving over time is vital to building up wealth,” says Roy Thompson, head of financial advisers at accountancy firm Carpenter Box. As with those aged under 20, employees should ask to opt-in to a work scheme and see if you can forgo some luxuries to maximise contributions.

If you’re self-employed, like an increasing number of people in this age group, you should still consider a private pension contribution. It’s important to get into the habit of putting aside money for later. 

“Saving for the future while in your twenties may feel particularly tough in the current climate, with household bills, rent payments and general day-to-day costs all going up,” says Montgomery. “But that doesn’t mean it’s any less important. What you do now will hold great bearing on your future, so it’s about thinking cleverly about how you can navigate how much money you need for day-to-day spending while working towards your future.”

Take, for instance, someone investing £100 a month into a pension pot from the age of 25. By the time they reach retirement, they’ll have saved £48,000 for their pension. You could achieve the same base amount of money by starting to save 20 years later, at the age of 45, and putting in £200 a month. But compound interest would mean the 25-year-old’s pension pot would be nearly twice as big, assuming a 5% annual return. 

The compound benefit of regular saving over time is vital to building up wealth

“Younger people have the power of compounding, whereas those 40 or 50 year olds don’t have time any more,” says Zoe Dagless, financial planner at Vanguard UK. “As much as they think it might not be that much, that will get them a long way when they are 60 or 65 compared to starting that planning aged 40.”

A stocks and shares ISA can be set up with contributions as low as £25 a month and a ceiling of £20,000 tax-free per year. “By putting away a small amount each month you can soon build up a substantial pot,” says Montgomery. That’s especially true in the current climate, where the stock market is on a post-pandemic upswing. 

The same attitude that may make people in this decade reticent to even think about pensions could potentially help them embrace slightly higher risk investment options: if markets collapse, you’ve still got 30 years or more of your working life to rebuild your pension pot. Dagless recommends trying to put away cash while not looking too closely at the dips, if someone is worried about losses. In the long run, they’re still likely to benefit.

However, don’t throw caution to the wind. Thinking about your attitude to risk at this age is key. “History suggests that a higher investment risk would be rewarded over the long term, although this is not guaranteed or suitable for everyone,” says Thompson. “Younger individuals should engage with investment risk and educate themselves on it.”

30s: growing your pension pot

If you’ve put in place a smart strategy to build up your pension pot, this decade is where things should really start to build up steam. Workers may well have switched jobs multiple times by this point of their working life and accumulated a collection of different pension plans from employers. You should think about amalgamating pension plans into a single collection to reduce the administrative burden and paperwork involved. But be careful – some plans will charge you to move your money, which can counteract any benefits, says Thompson.

For those lucky enough to have built up a high salary by this age, pension contributions can become a tax-easing strategy. If you’re earning more than £50,271 a year, you’re currently in the highest tax band. Contributing to a pension could help you get tax relief of up to 40%. If you’re bringing in more than £100,000 a year, you could lose your first £12,570 of personal allowance of tax-free income. “Pension contributions can potentially help retain this by bringing your taxable income back down to £100,000,” says Ross.

Think cleverly about how you can navigate how much money you need for day-to-day spending while working towards your future

Your thirties are also likely a time when you’ll be thinking about big life decisions, including potentially starting a family. “This is the most difficult time of life,” says Dagless. “You’ve got mortgage pressures, family pressures, everything.” Parental leave and the additional cost of rearing a child can make your pension contributions slightly haphazard. 

“There are steps you can take to ensure any time you take away from work doesn’t adversely affect your future retirement savings,” says Montgomery. “For example, choosing to pay in extra in the run up to your leave, encouraging your partner to pay into your pension while you aren’t earning, or making use of the ‘Carry Forward’ rules once you’re back in work.”

Whatever you do, make sure you don’t lose track of the importance of your pension. With so many competing interests, it can be very easy to allow planning for the future to take a back seat. But given average life expectancies, those currently in their 30s are likely to have 20 or more years in retirement, which means saving up plenty to ensure your standard of life doesn’t take a big hit when you leave the world of work.

40s: shifting your pension strategy 

Those in their forties shouldn’t necessarily pursue the same strategies that worked for them in the previous two decades of work. At this point in their lives, their goals for their pension are likely to be significantly different than in prior decades, demanding a different approach. 

Montgomery advises thinking about self-invested personal pensions (SIPPs) to supercharge saving towards your retirement. Opening one is simple, and you can drip-feed investments into it from as little as £20 a month. “With a SIPP you choose where your money is invested, giving you control over your pension,” she says. “You might also be able to transfer existing pensions you have into the SIPP, making it easier to see how your retirement savings are growing.”

Higher earners will want to be cautious at this age, taking stock of their pension plans and ensuring they don’t get close to their lifetime allowance of £1,073,100 in pension savings. Anything above that amount could be subject to significant taxation upon retirement, diminishing all the hard work you’ve put into saving over the years when you want the money most. 

“If you’re in this situation you can also look at ‘protection’ options which, even though restricted, will essentially give you your own lifetime allowance,” advises Montgomery. So-called tax efficient wrappers – which insulate your cash from having tax taken off, such as ISAs or pension contributions – can become more beneficial at this age for higher earners or those with a significant pension pot already saved up, says Ross, who suggests seeking financial advice for the best possible strategy. 

Your forties are also the time to start making big decisions. Thinking about your retirement goals in this decade is crucial, says Thompson. When do you want to stop working? What kind of life do you want in your retirement? Are you looking for a quiet time or a never-ending parade of round-the-world cruises? The answers to all these questions can help pinpoint what kind of income you’ll need when it comes time to leave the world of work. 

“By looking at what savings an individual already has, a cohesive savings plan can be put together looking at the suitable level of risk for investments as individuals move toward retirement and a quantum of pension payments to build the required sum,” he says.

50s: preparing for retirement

This decade is one to tie up loose ends and ensure things are steady as they go. Any risky bets made in your 20s or 30s should now be unwound and made safer. “They are approaching a point in time that they will be reliant on pension assets to deliver an income,” says Thompson. It’s not the time for big bets that can go wrong. 

It’s also worth consolidating pension plans in much the same way as those in their 30s. “Legacy pensions may not be appropriately invested or at a suitable cost and a consolidation exercise could be beneficial,” says Ross. 

There’s also the big question of when or if to take a lump sum from your state pension; this is currently available to people at the age of 55, but it will soon rise to 57. Before doing so, it’s important to audit what you’re likely to get from your state pension. If there are any shortfalls that could scupper your plans and give you a smaller sum than expected, see if making additional contributions can help fill the gap. But be conscious that there’s only so much you can do at this stage, says Thompson. 

“Having an understanding around how pension benefits can be taken is essential. There are now a range of options and there is no silver bullet.”