Start saving for your pension early

Advances in medicine and in living standards mean we are now living longer than ever before. Indeed, according to New Scientist magazine, half the people who have ever reached the age of 65 - in the entire history of mankind - are alive today and estimates of life expectancy suggest that the average female born today will live a staggering 91 years.

All of this is great news for us as individuals as it offers the prospect of a longer, healthier and happier life. However, before you start dreaming of such a retirement, with endless games of golf, decades of holidays and extended time with the grandchildren, its worth considering how you are going to pay for it.

These raised expectations for our older age mean that saving for our retirement is perhaps more important than ever – but also, the earlier you start, the easier it is. Indeed, the money you save between the ages of 25 and 35 could account for half the amount you get back when you reach 65 so even if retirement seems no more than a distant dream, doing something proactive could really benefit you long term.

The reason for this is compound interest – that is, the way in which interest you earn on your money begins to earn interest on itself. For example: if you invest £5,000 and leave it for five years at an interest rate of 5% pa then, at the end of 5 years, you will have £6,381. 5% of this initial £5,000 would be £250 a year – a total of £1,250 – but the money actually earns £1,381. This additional £131 is the amount earned by the interest itself. Simply by leaving the interest you earn invested, you can earn even more interest - for no additional outlay whatsoever.

The best thing about compound interest though is, the longer it is left to work, the more impressive the figures become. If you left that £5,000 invested for 10 years, your total return would be £8,144 - £644 of which would be entirely down to the interest earning interest. Turn the calculation around and you find that if you want to achieve a pension fund value of £100,000, assuming an interest rate of 6% pa after charges, it would cost £50 a month from age 25, but doubles to £100 a month if you delay the decision to age 35, just 10 years later.

Of course, your contribution rate is not the only factor to consider in achieving a decent pension. The assets you choose, the charges you pay and the underlying performance you achieve - plus the level of inflation, interest rates and hence annuity rates on the day you retire - are all just as important. Many of these can be planned for - but like anything, the earlier you start to think about it, the easier it will be.

Retirement planning
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