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How to save for a pension when you're broke in 2021

Jar full of coins being saved for a pension. Photo: Getty
Jar full of coins being saved for a pension. Photo: Getty

It will come of no surprise to many that today, few people feel financially confident about retirement.

Fewer than one in 10 UK adults are confident they will have saved a comfortable amount into their pension when they stop working, according to a 2019 survey by NFU Mutual. Of the 2,022 polled, only nine percent said they were unfazed by their finances saved for retirement. More than half aged between 25 and 54 said they were nervous or unsure.

The growing number of self-employed people may also contribute to pension poverty in the UK. Those who are self-employed are not automatically enrolled into a pension scheme - and that there’s no employer contributing to their savings.

The NFU Mutual survey found only 23% of surveyed self-employed workers said they had paid money into a pension pot - and 16% of all workers said they did not have a pension pot at all.

Saving for a pension is easier said than done, however. It will come as no surprise that for many, putting money aside for retirement simply isn’t an option when the majority of your income goes on rent, bills and food. So how can you start saving for the future when you’re broke?

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“A pension is about ensuring that there is something available for you when you either have to stop work, or hopefully are able choose to stop work. The state pension will provide some income but it is unlikely to be enough to sustain most people,” says Ian Richards, chartered financial planner and founder of Work to Live Financial Planning.

The full rate of the new state pension will be £175.20 per week (in 2019/20) but what you will get could be more or less, depending on your National Insurance record.

“By saving into a pension you can build up options for when you do stop working, the more save money you save the more that will be available to you later,” Richards says. “There are numerous tax advantages with paying into a pension, as well as the ability to take advantage of compounding returns over the long term. The purpose of a pension is for there to be a pot of money available to provide security and hopefully freedom so you can have an enjoyable retirement.”

The key for anyone when managing money is to have a handle on your spending and where your money is going. “This may require you to do a spending review,” Richard says. “Check if you are spending money in line with your priorities. Paying yourself first - such as into a pension - is a staple of building stronger finances.”

Try to identify areas that you could cut back on even if it is a small amount. It might be worth switching energy suppliers or changing your internet provider if it means you can save money in the long run. Shopping cleverly for food can lead to savings too, such as bulking up meals with pulses and getting into the habit of freezing food to avoid waste.

Alternatively, Richard suggests increasing your earning with perhaps a second job or side hustle, if you have time.

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“Even a small amount of money paid in regularly and over a long time can have a significant impact on what is available for you,” he says. “The longer you leave paying into a pension, the more you will either have to pay in the future or the longer you may have to work.”

If you are employed, speak to your manager about pension options too. “Most employees are auto-enrolled into a company scheme, if you have opted-out speak to your employer about opting back in as your employer will also be contributing. This means you will benefit from them putting money into your pension,” Richard explains.

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“The self-employed will need to set up their own plans. Some providers may have minimum amounts you need to pay in each month, so you may need to do some looking around if you can only pay in small amounts.”

Although paying into a pension pot is beneficial to most people, it’s still important to consider your individual circumstances. “For example, if you are paying high interest on debts such as credit cards, your first approach should be to come up with a debt repayment strategy to clear these,” Richard says.

“Getting rid of debt like this needs to be a priority. Once your debt payments are cleared this will free up additional money which could then be directed into a pension.”