Invest that NI windfall in a pension

You have probably heard the theory that you are never too young to start a pension but the message may not hit home unless you become aware of how much more painful it will be if you delay.

A man aged 40 who is prepared to pay £500 a month into a pension, aiming to retire at 65 will reduce his retirement income by 49% if he delays for five years.

Statistics from the Financial Services Authority show that a 25 year old who plans to retire at 60 will be able to buy a pension of £54 a month, at today`s value, if they put in £20 a month until they finish work. A 55 year old who saves £20 a month until the age of 60 will end up with a pension of £4 a month. A 30 year old who puts in £200 a month will end up with £421 a month from the age of 60 but a 55 year old putting in the same amount will have a retirement income of £46. In each case the investor`s contribution is topped up with tax rebates.

Sophie Neary, product director for BeatThatQuote.com says: "Many people in their twenties feel they cannot afford to save for a pension but it may be possible with some budgeting to find the amount you need to get started.

"Unexpected windfalls or payments later in life can be used to boost saving."

Recently many people have become eligible to claim refunds from the Government because they paid too much in National Insurance contributions towards state pensions. These people were boosting their NI contributions to plug gaps in their contributions records but the Government has now reduced the number of years` of contributions necessary to qualify for a full pension.

"Rather than blowing a windfall on a new car or holiday it might be worth investing the money," says Sophie Neary.

If you have expensive debts such as credit card borrowing it might be worth paying this off first because the "return" on debt repayment is high and risk free.

Beyond this, if you are employed by a company that offers a pension scheme, look at increasing contributions; normally employers will contribute to the scheme on behalf of employers. When combined with tax rebates on pension contributions, payments into a company pension can be worthwhile.

If you do not have access to an employer`s scheme you could look at stakeholder pensions, low-cost schemes designed to a Government specification. A personal pension offers a similar structure but the charges are likely to be higher. A key consideration is whether the pension you are considering links retirement income to your earnings at work or will depend on investment growth in your personal pension fund.

When you contribute to a pension scheme you will not normally be able to touch your savings until you are ready to retire. For some people this is a major disadvantage of pensions. But this need not be an excuse to do nothing. One of the reasons that starting young can make pension saving relatively painless is that contributions have many years to accumulate as interest is earned on interest. Compounding works its magic on any saving where interest is reinvested and added to the underlying lump sum.

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