Your 20s is the decade when you get to do many things for the first time – getting your first decent job, buying your first car, getting on the property ladder and many more. For many, the 20s is also the time when you have fewer responsibilities and get to have enough money in your hands to be able to afford treats like regular meals out and travel.

Having reached financial independence, planning for your later life may not be at the forefront of your mind right now. You may be paying off a student loan and you want to enjoy your money. But here’s the thing about pensions: the earlier you start saving, the better. There are a number of reasons for this, let’s see what they are.

Time is on your side

One of the most valuable benefits of your 20s is time. You have time to save enough to be able to afford an enjoyable life when your working days are over and you come to retire. You also have time to experiment with saving and to build good saving habits. For example, you may find that you don’t want to be saving an awful lot from the get go. You can start with a small sum you are comfortable giving up in the beginning and then build it up in the future. Or you might decide to go all in and to save as much as you can towards your pension while you’re young and don’t have a family to care for. Whatever your approach, starting early means you have time to build a larger fund over your working life that’d help set you up for a brighter future.

The power of compounding

Have you heard of compounding? It’s a good one to know when it comes to pensions. It’s a term used to describe the process of achieving growth not just on the money you’ve paid in or invested initially but on the growth of it as well.

You are probably aware of the concept of investing - the longer we keep our money invested, the more time it has to grow. Ideally it can grow and then grow on the initial growth and build upon itself over time.

Here’s a simple example of compounding:

Let’s say you invest £1,000 towards your pension that earns 5% interest per year. For the first year your investment will have grown by £50 (5% of £1,000) which means you now have £1,050. However, the following year you’ll gain 5% of what you’ve achieved already £1,050, not on the original invested sum of £1,000. So, your investment will grow by £52.50. The more time you give your money to compound and grow, the more you’ll have to live on in retirement. 

Dubbed by Einstein as the eighth wonder of the world, compounding can be especially powerful the longer time you have to invest your money.

Your pension benefits help you save more efficiently

If you pay into a workplace pension, you can tap into lots of additional benefits that come as part of it.

You’re not saving alone

One of the most valuable benefit is the fact that you’re not saving alone. Your pension with the Railways Pension Scheme is classed as a workplace pension, so both you and your employer pay into it. Think of your employer’s contributions as ‘free’ money for you!

Tax relief is your side-kick

Tax relief is one of the reasons why saving for retirement, as with the Railways Pension Scheme, is such a fantastic opportunity. It means you don’t pay any tax on the money you put in, which makes your money go further in the long run.

The amount of tax relief you get depends on the rate of income tax you pay. Basic-rate taxpayers (who pay 20% income tax) get tax relief at the same rate. If you’re a higher-rate taxpayer you get 40% tax relief, and additional-rate taxpayers get 45%.

So, if you’re a basic-rate taxpayer and want to put in £100, all that money will end up in your pension as you won’t get charged any tax on it. Otherwise, you would’ve been left with £80 as the taxman would’ve taken £20 off you.

Saving extra towards your pension is tax-free

With the Fund, you can boost your pension savings tax-free by paying in Additional Voluntary Contributions (AVCs). AVCs are a great way to save extra towards your pension either by making regular or one off payments into it. So, if you get a bonus or a monetary gift and want to spend it wisely, why not consider paying it towards your pension? And you’d get tax relief from the government too. This could be a great way to make the most of your current pension Annual Allowance before this tax year comes to end in April 2024.

Be wise and savvy with your money

Making sound financial decisions that work in your favour is something you learn over time. However, there are ways to ensure you’re making the most of your money even if you don’t have much financial or pension knowledge right now. Keep track of your money!

If you are in your 20s, you may be part of Generation Z*. Being a Gen Z-er, you’re probably striving to be as paperless as you can be but that doesn’t mean you can’t keep a comprehensive record of your income vs spending. There are a number of mobile applications, spreadsheets and other online tools to help you keep a record of your spending. Having a clear view of your finances could help you identify where you can reduce your spending, so you have some more money to put towards your pension, like opting for homemade lunch and coffee for example.

*Generation Z – people born between 1997 and 2012