When you’re in your 20s or 30s, your pension is unlikely to loom large among your priorities. After all, this is the time in your life when travel, relationships and getting on the housing ladder may be more pressing concerns.

And, for many of us, there’s student debt to contend with too. If you started your undergraduate studies post-September 2012 and earn more than £27,295, for example, you’ll be paying back 9%1 of whatever you earn above that threshold, which will certainly cut into your capacity to save.

That can be daunting. And given the relatively high interest rate on student loans, which is set to rise further this September2, you might wonder whether paying those off should be your priority.

However, it’s worth remembering that most people won’t ever pay off the full amount before the debt is written off after 30 years. In contrast, the money you invest in your 20s could benefit from decades of compounding.

Freedom cuts both ways

Your early adulthood is a period in your life when you might be richer in time and freedom than you are in cash terms – so it’s easy to spend everything you earn. But you also have the freedom to be flexible. With fewer responsibilities, it may be easier to rein in some spending to ensure you’re saving more for your future.

There are good reasons why you might want to do just that. You may have medium-term family-orientated or housing goals, for example. And, if you put your mind to it, you have longer-term goals too. After a long career, you don’t want to end up in a position where you can’t afford to stop working or continue enjoying a comfortable life.

You may also like the idea of becoming financially independent as quickly as possible so you can retire early.

Why it pays to start early

Saving is the best way to invest in your long-term security – and when you’re still in your 20s, you have time on your side.

A sensible starting point – once you’ve cleared any high-interest debt, like credit card debt (always do this first!) – is to think of the cash you might need in an emergency. What if you suddenly lose your job? What if you incur an unexpectedly large bill? What if you have an accident?

Once you’ve built up these ‘rainy day’ funds, it’s then time to think about investing in your future self.

The potential benefits of early saving are startling. Let’s assume, for argument’s sake, that you invest your savings in a diversified portfolio of global shares – something you can do easily by investing in a fund that tracks a global stock market index such as the FTSE All-World index.

Now, the FTSE All-World index in British-pound terms has delivered an average calendar-year return of 9.9% since 31 December 19933. But the chances of replicating that sort of performance any time soon are low, say our economists. So, let’s be more conservative and assume the annual investment return over the next few decades is 6%.

On that basis, we calculate that an investor putting away just £262 each month from the age of 25 will be able to accumulate more than £500,000 by the time they’re 65.

This example doesn’t take into account the extra tax relief that could be earnt, depending on how the money is saved, which could potentially boost the savings still further (more on this later). It also doesn’t consider the investment platform and fund management fees that would need to be paid, dragging on the potential return – which explains why, at Vanguard, we put so much emphasis on keeping your costs down.

The key takeaway, though, is that the total contributions in our example only make up a quarter or so of the final £500,000 sum. The rest – almost £375,000 – is made up of capital growth.

That’s the power of compounding – the multiplier effect as your investment returns combine with your capital contributions to help your wealth grow. And the longer you give it, the more dramatic the potential effects.

It’s why, using the same set of market assumptions, our investor would have to put away £514 a month to reach half a million pounds if they did it over 30 years – £185,000 of invested capital and £315,000 of capital growth. And why it would require £1,103 a month – almost £265,000 of invested capital and £235,000 of capital growth – to get there in 20 years.

All these numbers are just to give you a sense of the possibilities. You know what your goals might be better than anyone. You also know how much you can realistically put away right now or what you may yet be able to put away as your career progresses and your adult life unfolds.

Pension power?

When you’re young, retirement can seem worlds away – something you’ll take care of ‘nearer the time’. But nowadays some of the decision-making is already made for you. If you’re over 22 and working full time, for example, you’ll be enrolled automatically into a workplace scheme.

Many employers also match employee contributions up to a certain level. This gives you a powerful incentive to save – free money! – and you should consider paying in enough to receive the full match amount. Only once you’ve exhausted this avenue, should you really consider supplementing it with a self-invested personal pension (SIPP).

That said, having a SIPP in place can be useful if you’ve changed jobs and expect to do so again and want a single vehicle within which to bring together your different workplace schemes.

There’s also the tax relief that you can earn on your pension contributions – which is added automatically to your pension in the case of basic-rate tax relief or can be claimed back through your annual tax return for higher-rate taxpayers. In the case of our first example, this would effectively mean that instead of £500,000 our diligent 25-year-old would build up almost £625,000 after 40 years.

Combining goals

Of course, you might not want to lock up your hard-earned savings until you retire – even if, with pension freedoms, you can access retirement savings earlier than ever4.

You might need the money sooner – to help with a house deposit or wedding, for example.

How, then, should you balance your shorter-term and longer-term goals? Well, one thing that is important to remember is that these aims can be complementary. The earlier you buy your home, the earlier you can pay off your mortgage. And when you’re rent or mortgage-free, your pension will go further too.

You can also use an individual savings account (ISA) to fulfil more than one goal. ISAs are more flexible than SIPPs. They don’t offer the same tax relief on the way in but, as with SIPPs, you don’t pay any tax on any of the capital gains or income you earn within it. You can also take out your money at any time – and unlike pension income, it won’t form part of your taxable income.

That can be especially useful if you’re unsure of your goals and just want to grow your wealth and tap into these savings as and when needed. It can potentially also supplement your pension savings further ahead if left largely intact.

Whichever way you do, it pays to save early and save often!


1 See the HMRC website for more details on when you start repaying and how much you repay, depending on your plan. The repayment earnings threshold is expected to drop to £25,000 for students starting in September 2023.

2 The rate rise has been capped at 7.3%.

3 In total return terms, with dividends reinvested, and without accounting for costs. Vanguard calculations, based on data drawn from Factsheet, as of 15 July 2022.

4 From the age of 55 rising to 57 in 2028.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

The eligibility to invest in either an ISA or Junior ISA depends on individual circumstances and all tax rules may change in future.

If you are not sure of the suitability or appropriateness of any investment, product or service you should consult an authorised financial adviser. Please note this may incur a charge.

Any tax reliefs referred to in this article are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.

Important information

This article is designed for use by, and is directed only at, persons resident in the UK.

The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

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