Sometimes Present You does a favour for Future You.
Maybe it’s the fresh glass of water and paracetamol by the side of the bed that you wake to find after a late night, remembering only faintly that you placed them there hours before. Or maybe it’s the unexpected arrival of the concert tickets you’d pre-ordered months ago, but had forgotten entirely about.
These acts of foresight somehow make the eventual reward even more satisfying. Having forgotten the trouble you took to arrange it, the end result comes as a happy surprise, almost as though someone has done you an unexpected favour.
Pension saving is perhaps the ultimate case of this - of Present You doing a good turn for Future You. The time and cost of saving now turns, over many decades, into a substantial and potentially life-changing reward in the future.
A new Fidelity tool helps to show how powerful this can be. You can try it for yourself.
The idea is to show what a difference contributing just an extra 1% of your salary now will make to your retirement fund. After entering your name and age, the tool asks for your current salary and to specify something you enjoy in your free time - something you’d like to be doing if you had more time and money to do it.
Then it works out what those extra contributions could add up to when you eventually come to retire, as well as the cost to you now of making them.
For example, a 30-year-old today earning £30,000 could contribute an extra 1% of their salary and then retire at age 68 with an extra £58,273 in their retirement fund. This example assumes that wages will grow by 3.75% and that the return on invested contributions is 5% after fees.
And the contribution required now for a chance of this reward? Less than £6 a week - although tax relief on pension contributions means that actual cost is even less than that.
There may be ways to make the rewards for Future You even bigger again. If you contribute through a workplace pension scheme, some of your pension contributions may be matched by your employer. If this applies, your extra 1% contribution would be matched by 1% from your employer and the eventual reward is more than twice as much.
Of course it may be that, having upped your contributions by 1% once without feeling much pain, you’ll decide to up your contributions by another 1% in the future - it’s a good habit to get into.
The reason why such small extra amounts can make such a difference is that pension contributions have potentially a very long time to grow, with investment returns compounding over many years.
So take the 1% challenge today. Future You will thank you for it.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment or action. You should regularly review your investment objectives and choices and if you are unsure whether an investment is suitable for you, you should contact an authorised financial adviser.