SAVING into a pension can mean the difference between retiring early in luxury or having to work until you’re 80.

But the world of pension saving can seem complicated, and there are lots of small decisions that can make a massive difference to your savings long-term.

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For instance, the difference in retirement fund between someone who started contributing to their pension when they are 22 and someone who only begins at 40 could be as much as £240,368 even if you only save the minimum.

Choosing to start saving even earlier, for instance at 18, adds another £69,112 to the pot compared to starting at 22.

To help you understand the thorny world of pensions saving, we spoke to several experts who’ve shared the key decisions to be aware of and when you should make them.

Before April 6 next year

Sir Steve Webb, a former pensions minister and partner at consultancy Lane Clark and Peacock, has flagged one fast-approaching deadline to do with your state pension and national insurance record, which falls on April 6 next year.

“This is the date when the much more relaxed rules about filling historic gaps your NI record ends,” he explained.  

“After that date you can only go back the standard six years, whereas until then you can go back to 2006.”

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Your national insurance record determines how much state pension you get, and you need 35 years of contributions or credits to get the full amount. Webb says that it’s vital that people check their NI record – preferably well in advance of that date – and consider filling any gaps.  

He added: “Note that this more relaxed deadline only applies to people on the new state pension, i.e. those who reached pension age since 6th April 2016. 

“It’s already too late to fill gaps for those who retired under the old system.”

A gap of one year is typically worth 1/35 of the full pension rate.  At £221.20 this year, that’s £6.32 per week, £328 per year, or a little over £6,500 across twenty-year for every one year gap that you fill.  

HMRC now has an online tool which allows you to look at how much it would cost to fill different years and what effect that would have on your pension, or you can ring the DWP Future Pension Centre if you want to speak to someone.  

Webb says: “Before paying you should also think about whether you might qualify for NI credits, perhaps as a grandparent looking after your grandchildren for part of the week, or by claiming sickness related benefits if you are unable to work.

Aged 18 (or when you get your first job)

People over 22 get automatically enrolled into a pension if they’re in work and earn more than £10,000 from a single employer. But if you start work earlier, for instance at age 18, you can still ask to be added to the scheme.

You’ll have to pay in 3% of your qualifying earnings, which is everything between £6,240 and £50,270, but your employer will also pay 4% in on your behalf and you’ll get tax relief.

Altogether, it adds up to 8% of qualifying earnings and you only pay a fraction of that. Even better, you’ll benefit from compounded investment returns.

In fact, Royal London has calculated that starting saving when you’re 18 could add an extra £70k to your pot at retirement, compared to starting at 22.

Royal London’s pensions expert Clare Moffat said: “Pension wealth benefits hugely from the magic of time. The longer money is invested, the more it can grow. So, the best preparation for your long-term future is to start saving as early as you can. 

“A head start of just four years could mean you’re £69,112 better off by the time you retire, if you started saving at 18 rather than 22. That’s a massive difference, with a pension pot 15% larger, just by starting to save as soon as you start working.

*Starting salary of £21,000 at age 18, assuming salary increase of 2.5% per annum, (22 starting salary is £23,180, 30 starting salary is £28,243, 40 starting salary is £36,153) 8% pension contribution on total earnings and 5% growth and retirement age of 67

Every time you start a new job

Whenever you start a new job with a different company, there are things you should do. The first one is to make sure you’re joining the company pension scheme, which should happen automatically if you’re aged over-22 and earn above the qualifying thresholds.

Another important thing to check is whether your company offers something called matching. This is when your employer offers to put more money into your pension each month if you do, usually up to a cap. You will need to contribute a little more, but you get free cash from your bosses which you’d otherwise lose, and it can make a massive difference to your retirement.

The table below from Aon shows the difference that taking advantage of matching can make, adding hundreds of thousands of pounds to eventual sum you can retire on. 

Steven Leigh, associate partner at Aon said: “While it may be hard to find the extra money, saving more into your pension if your company offers matching contributions is like getting free money from your employer. 

“For people wondering whether it is worth it, as our figures show, saving tens of pounds now could mean you end up with tens of thousands more when you come to retire.” 

He added that while there is no right age to do this, the earlier you start, the better.

This is because money you save into your pension in your 20s or 30s will be worth far more than the same amount if you saved in your 50s or 60s because it will have far longer to benefit from investment returns.

Assumes median (average) salary for relevant age and a retirement age of 65:

When you get a pay rise

Every time you get a pay rise, you should consider funnelling some of the extra money into your pensions savings. Doing this straight away means that won’t have got used to the extra cash in your pocket and hopefully won’t miss it.

This is particularly important if your pay rises beyond £50,270 as auto-enrolment doesn’t apply to earnings above this threshold.

Brewin Dolphin explains: “Let’s imagine you’re on a salary of £55,000, are a member of an auto-enrolment scheme, and pay 5% of your qualifying earnings into your pension.

“Each month, you would make a £183.46 pension contribution and receive an estimated take-home pay of £3,302.381. 

“If your salary increased to £60,000, your pension contribution would remain at £183.46, whereas your estimated take-home pay would increase to £3,544.04 – that’s an extra £241.66 in your pocket every month. 

“It might be tempting to keep this cash for little luxuries, but putting it in a pension could increase its value by a huge 20-45% because of the tax relief you’ll receive. This could make a big difference to your future.”

If you have a baby and take maternity or paternity leave

When you’re on maternity or paternity leave, your employer must keep paying into your pension at the usual rate based on your salary before maternity leave for the first 40 weeks, after that it will depend on your employment contract and scheme rules.

However, your auto-enrolment contributions will be based on your actual maternity or paternity pay, which may be much lower.

This could have a serious hit on your overall pensions savings, particularly for mothers who often take up to a year.

If you can afford it, you can choose to keep contributing at your normal level, which will protect your pension pot.

When your child goes to school

Many parents pay hefty nursery fees in the early years, which can significantly impact their ability to save for retirement. However, if you are eligible for free-hours from the government, or when your child goes to school, consider funnelling some of that spare cash into retirement.

According to daynurseries.co.uk the average annual cost of full-time nursery is £15,865.72.

If your child went to school when you were 37, and you saved just half of this money into your pension pot between that and 67 (the state pension age for those born after April 1960), you’d have funnelled away an additional £237,985.80, and that’s without investment growth or tax relief.

When you’ve finished paying off your mortgage

A mortgage is another big expense that can stifle your ability to save, but again, once it’s cleared consider funnelling some of the savings into retirement. According to Unbiased.co.uk, the average monthly mortgage repayment on a house in the UK is currently £1,441.36.

That works out as £17,296.32 a year. If you paid off your mortgage aged 50, and started paying that into your pension instead, in just 15 years you’d add £259,444.80 to your pot.

When you’re 50

From age 50, you’re entitled to a free Pension Wise appointment. This service is designed to help you understand the different options available to you, and the things you need to consider.

One of the biggest mistakes people can make is to withdraw all their cash more quickly than they need. 

There are three issues with this, the first is that you pay tax at your marginal rate, so clearing out a pension unnecessarily (for instance to put it in the bank), could mean a 45% tax bill that could otherwise be avoided.

The second reason is that money left in a pension can continue to be invested and grow tax-free. The third is that when you die pensions sit outside of your estate for inheritance tax purposes.

Seeing a Pension Wise specialist can help talk you through the pitfalls, but it might also be worth taking advice. An IFA can give you personalised recommendations based on your financial circumstances, and make sure you know the difference between an annuity and UFPLUS and which is right for you.

Retirement Income Market Data from the FCA shows that of the 280,000 plans that entered income drawdown during 2023/24, only 46% benefited from professional financial advice compared to 66% using advice five years earlier.

Use of advice has fallen for all methods of accessing pensions over that timescale, except for annuities where it has risen from 26% to 32%.

“The trend towards more pensions being accessed without professional advice looks like a massive red flag,” said Stephen Lowe, group communications director at Just Group.

“Retirement decisions are some of the trickiest financial decisions that people will ever face. That’s particularly true for income drawdown where the saver is being asked to shoulder all the longevity and investment risk and is likely to find their income fluctuating over time.”

It’s also important to make sure your pension providers know when you want to retire and which of the retirement options you plan to choose. This can help them make sure your money is invested in the right way for your goals.

When you retire

If you decide to do drawdown in retirement, you need to make sure you choose the right provider. This means looking at charges and what exactly each one offers in terms of flexibility to withdraw funds.

Meanwhile, failing to shop around when buying an annuity can easily lose pension savers thousands of pounds.

More than 1,500 annuities were sold every week in 2023/24 but four in 10 (41%) were to retirees buying from their existing pension provider according to figures released by the FCA.

This raises concerns that many people may inadvertently be choosing convenience over value.

Analysis of current annuity deals by retirement specialist Just Group shows significant gaps between the best and worst income on offer, and that older buyers face a much higher income gap than those buying at younger ages.

A healthy 75-year-old can secure 20% more income from the best annuity provider compared to the worst. The best-worst gap is 18% at age 70 and 13% at age 65. The income offered could be higher once medical history and lifestyle factors are disclosed.

Stephen Lowe, group communications director at Just Group, commented: “The gap between the best and worst deals has been rising through this year. That is true for all ages we track but is currently particularly high at 20% for buyers aged 75.

“Annuities provide secure income, giving people peace of mind to spend what they receive without worrying if it will rise, fall or run dry during their lifetime. But there are no second chances when you buy an annuity – you must get it right first time.”

At State Pension Age

Your State Pension isn’t paid to you automatically, you have to choose to get it. This might seem like a no brainer, but for some people delaying might be a sensible choice as the government will boost the amount you get.

Lane Clark and Peacock’s Webb says: “A lot depends on your individual circumstances.  Most people who have stopped working will need their state pension as soon as they can have it.  But if, for example, you carry on working past pension age then it may be worth thinking of deferring until you’ve stopped work.”

One reason for this, he explains, is tax. Suppose that your employment mops up all of your tax-free personal allowance and that you’re a basic rate taxpayer. 

If you draw your pension at the same time, then every penny of your pension will be taxed at 20%. 

But, if you defer taking your pension until you don’t have a wage coming in, then the £12,570 personal allowance will cover all or most of your state pension so you won’t have to pay as much tax.  

You also get an uplift of 5.8% for each year of deferral.

However, he cautions that the two groups who should be particularly wary of deferring their state pension are those with a relatively low life expectancy and those on benefits. 

He says: “For those who don’t expect to live long in retirement, they may unfortunately not get back in enhanced state pension what they gave up by not claiming it on time.  For those on benefits, any improvement in state pension for deferring could be clawed back in whole or in part through reduced benefits, so again you may have done better to claim the money on time.”