So last week I took a break! Guess what; I was trying to figure out social media posting (auto-posting from Facebook to Instagram, using mail chimp…); still a work-in-progress, but I’m on it and will get there.
So today I want to share that I have been thinking about TIME! How much more time do I have to do all the things I want to do? Will I be well enough and/or active enough to keep going for as long as I have? Worrying and Scary thoughts, especially for someone like me who started actively making provisions for the later years in my golden age! You might think, what does this have to do with finances (which is the focus of these blogs)?
The point of the question is to share my realisations on how soon or not, one should start planning for the later years and what protection to have in place, in case things don’t pan out the way you hope.
So my reality is that I have been fortunate to have been in continuous employment for more than 20 years. Amidst that time, I had the opportunity to work outside U.K. as an expatriate who was paid a local living allowance and also paid a salary in the U.K. In spite of that, I only started contributing to a pension scheme about five years ago 🙈! Each time I joined a pension scheme I pulled my contribution out of the scheme, just before the deadline I was able to do so. As my previous blog posts allude to, I also didn’t start investing until less than a year ago! So I lost the opportunity for my employers to pay into a pension scheme on my behalf and I wasn’t investing (or saving) either! In addition, I had all these grand ideas of what I want to do to make an impact, but only just started actively steps towards doing any of them! As a result, I am now constantly plagued with worry about whether I have enough time to provide for a financially secure later year and at the same time deliver on those dreams to serve!
The realisation of where I’m at, has opened my eyes to various avenues one can prepare for a financially secure future, but also the protection one ought to have in place. It has also set me on a path/mission to get the message out there and encourage other older woman in the same position I am in, to make a start NOW (something is better than nothing) and; to educate the younger generation on what they need to be doing to ensure they are preparing for a financially secure future.
I recently spoke to a few young adults in my life and asked if they had opted-out of the pension scheme during their one year of paid internship; one said they did (saw it as a reduction to their disposable income) and the other didn’t even know (they couldn’t remember if they opted out or not)! This discussion affirmed to me that there was work for me to be do here.
So today’s post will focus on Pension (without going into the history – and there is a lot of history and now, projections on what it might look like in the future – state pension particularly)!
What is Pension: Wikipedia describes a pension as “a fund into which a sum of money is added during an employee’s employment years and from which payments are drawn to support the person’s retirement from work in the form of periodic payments.” (source: https://en.wikipedia.org/wiki/Pension) Contributions could be made either by the employee or by both an employer and employee and is invested across various regions (U.K. and Overseas) and asset classes, with a view to growing your money by the time you retire and are ready to draw the funds down.
Types of Pension (U.K)
State pension: this is a benefit paid by the U.K. government and anyone living in the U.K. is eligible, but timing of eligibility is dependent on age (which is dependent on sex). The amount payable is dependent on the number of years one’s been paying national insurance (to qualify for the maximum weekly amount, one needs to have been paying national insurance for 35 years) – more details available at https://www.gov.uk/new-state-pension
Workplace Pension: entitlement to payment from this type of pension is dependent on the contribution you have made into the scheme. When you join an organisation, your employer automatically enrols you into their pension scheme, provided you are eligible. Even if you are eligible to be enrolled, you can choose to opt-out immediately after your employer has enrolled you into the scheme, (as was the case in the case of the young adults I referenced above).
The pension regulator sets the minimum contribution rate both you and your employer must make into the pension scheme, but organisations might have a policy to contribute more than the minimum set by the regulator.
The workplace pension is also 100% tax deductible i.e. you your contributions are deducted before tax is calculated and you also benefit from tax relief of up to 20%.
The funds paid into the pension scheme on your behalf (your contribution and your employers’) are invested within a pool of fund
Self-Invested Personal Pension (commonly known as SIPP) – this is similar to other personal pensions, except that with a SIPP one has more flexibility with the investments; you decide which investments to make and manage your investments till retirement (sort of a do-it yourself pension). Anyone can invest in a SIPP, but caution is usually emphasised with this type of pension.
Do you notice the common theme in all the pension types?
• You get FREE money from the government
• You get FREE money from your employer (in the case of employment pension)
• Your contribution is TAX DEDUCTIBLE
• You benefit from TAX RELIEF
Most important reason why I will advocate for the younger ones to start their investment (yes putting money in a pension scheme is an investment, even though people don’t tend to think of it as such) is “TIME”.
In addition to all the freebies mentioned above, early investment in a pension scheme means you are giving “Time” a chance to work for you, during which period your money benefits from compound interest (which Albert Einstein is credited to have described as the eighth wonder of the world)! Imagine that the money invested makes money which is then reinvested and that also makes money and you keep adding to the pot that keeps making money! This I describe as allowing both “Time” and “your Money” to work for you! Nothing beats that. I wish knew this or had someone explain to me early on in my career. This is where I once again ask the question about whether being a finance professional means one is financially literate (at least to the extent of one’s personal finances – I wonder what other finance professionals think? It is my opinion that actively working towards a specific financial goal breeds awareness of the possibilities, which is why goals are important.
Below is an illustration using a pension calculator I found online, showing contribution required by both a 25 year old and a 50 year old to achieve a target pension pot total – note the difference in monthly contributions and the amount of compound interest earned by each of them! Did you notice the free money – contribution by the government? It really is worth taking advantage of all the freebies!
So yes, I started late but have started and am excited for what the years ahead hold.
So the message to anyone else in a similar position as me: just start! It is never too late; if necessary, speak to a financial advisor who would be able to provide some advice on what the options are for your specific circumstances.
So to the young adults out there; I see you all doing great entrepreneurial things and making huge strides – I am in awe when I hear some of the conversations being had amongst this group! It is however important to start putting things in place NOW! Let TIME work its magic for you, so start NOW. I’d be happy to have discussions with you and give you pointers on where to look.
N.B. For my non-U.K. followers, check out the type of pensions that exists in your country; the same concept applies – take advantage NOW, of any freebies on offer and of Time and compound interest to allow for financial security in the future.
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