A chartered financial adviser has shared practical advice explaining how putting part of your pay rise into a pension could significantly boost your future savings
People who got April pay rises should take action now, an expert said(Image: Getty)
A financial adviser has shared crucial guidance for those receiving a pay rise. With many workers having just received their annual salary increase in April alongside the new financial year, chartered financial adviser Martin Rayner from Compton Financial told Sky News that immediate action is required to prevent the extra money from vanishing.
He outlined a specific ‘rule’ that individuals should adopt when receiving a salary boost – describing it as the most sensible approach. He stated: “My best piece of practical advice is… follow the “never saw it” rule. Start contributing to a pension the moment you start working. Every time you get a pay rise, immediately divert 10% of that increase into your pension. If you never see the money in your bank account, you won’t miss it – but your 60-year-old self will treat you like a hero.”
Regarding pensions more broadly, he continued: “The smallest habit that can have the most explosive impact is… starting a pension when you get your first payslip. Some people wait until their 30s or 40s, but by then, they’ve already missed the most powerful growth years. Assume a 7% growth rate, and your money doubles every 10 years. If a 27-year-old starts now, their money has 40 years to grow before they hit state pension age.
That means every £100 they tuck away today has the potential to become £1,600 by the time they retire.” Martin Lewis has previously outlined why pension contributions represent an excellent method of stretching your earnings further. During a podcast last year, Mr Lewis emphasised two crucial characteristics of pensions that render them ‘unbeatable’. These include the fact that payments are deducted prior to income tax being applied, and that employers must legally make contributions.
He explained: “The two pensions superpowers which mean you can double your investment instantly. The most important thing I’m going to tell you about pensions today. This is crucially important – pensions have two superpowers in my view and I want to explain them. The first pensions superpower is this: You contribute to your pension through your pre-tax income. and that means you get more savings than it costs you. So imagine you’re putting £100 into your pension from your salary which is how many do it.
“Normally for someone who pays tax at the basic 20 per cent rate for every £100 you get in your salary you only take home £80 of it. Yet pension contributions are made before the tax is taken out. That means you get to invest the £100, because the £100 comes off your salary but you only lose £80 in your pay packet. So effectively the tax relief is the difference – you get a £100 investment and it only costs you £80.”
“If you are a higher 40 per cent rate tax payer you get £100 investment and only lose £60 from your pay packet. If you’re a top 45 per cent taxpayer you get £100 investment and only lose £55 from your pay packet.” Mr Rayner offered another valuable piece of advice regarding your property.
He explained: “Some common advice that might not suit everyone is… pay down your mortgage if you have spare money. While this is definitely suitable in some situations, paying into a pension can give you much better returns. For example, paying down a 4% mortgage saves you 4% on that money. A high-rate taxpayer paying £60 into a pension from their own money will get effectively £100 of benefit. A 66% return on the money. So a much better return on their money.”
