If you were offered the chance to turn £10 into £100, there’s a good chance you'd be interested.
Then, if you were told you were putting this money into an official scheme where the government adds a couple of quid, so you in turn only needed to put up £8 that would likely make the offer more attractive. But what if your employer also agreed to help out, so you only needed to part with a fiver to make a return of £100?
Wondering what this scheme is? It’s a pension. Potentially, for every £10 you put into the scheme - your £5 plus, your employer's £3 and the government's £2 - you could get £320 back, according to pension expert, Tom McPhail of financial advice firm, Hargreaves Lansdown.
Interested? You should be. It could be one of the best financial decisions you ever make.
Saving for your pension is easier than you may think
It's not some complicated and boring process that should be put off - but a savings scheme with great tax advantages. The downside is that you can't touch your pension pot for decades. But that's because a pension is simply a way to save for your future, and is why the government is keen to contribute.
Why you need a pension
Why should you save for your future? However indestructible you may feel, there is going to come a time when you can't work anymore and therefore can't earn. That may seem a long way off but the sooner you start saving for that future, the sooner you will ensure it's a happy and enjoyable one, rather than a miserable existence. And if you actually sat down and did the sums of how much you need to enjoy a comfortable retirement you may be quite shocked, hence the need to start early.
"Start saving for your retirement as early as possible – even if it is a relatively modest sum,” says pension expert, Tom McPhail of financial advice firm, Hargreaves Lansdown.
"For a given contribution and using reasonable growth assumptions, you would expect a pension fund to double around every seven years, so the sooner you start, the better."
Based on McPhail’s pension pot growth assumptions, if you saved just a tenner when you're aged 25, this pension investment could grow to £20 at age 32, then £40 at age 39, £80 at age 46, turning into £160 at age 53 and £320 at age 60. If you delay starting your pension until your 39, your tenner will only turn into £80, which neatly demonstrates the huge benefit of starting earlier.
These figures are only rough estimates as pension money can be invested in a wide variety of ways and with all investments there is a risk - as anyone with cash in shares or stock markets will have noticed in recent years. So it's important to understand where you can put your money, where you are comfortable putting it and how you can monitor how well it is doing.
Keeping an eye on your pension investments
"Take the time to think about where your money is invested," suggests McPhail. "You may find this daunting so don’t be afraid just to pick the default fund offered by your pension firm to start with. But the more interest you take in your pension, the more you are likely to get out of it. That may mean being able to retire earlier, or to retire with a larger income."
As seasoned investors know, the longer time-frame you're invested, the greater risk you can afford to take as, if things do go wrong, you have plenty of time to recover.
The riskiest investments often offer the best potential rewards so it's a case of sitting down and deciding how much risk you're comfortable with. As you get older, it's wise to take fewer risks with your savings as you want to know the cash will be there when you need it.
The final key message from McPhail is: "If your employer offers you a contribution into your pension, take it, even if it means having to put money in yourself. This is free money. Don’t pass it up."
