First Job, First Pension: Your Complete Guide

When you start your first job, there’s a lot to consider. Getting comfortable in your role. Connecting with your new colleagues. Learning new skills. Setting up your first pension and getting to grips with pension contributions.

Wait, what was the last one? Pension contributions?

It might not be front of mind when you start your first job, but getting into the habit of saving for your future right from day one could help you grow a good-sized nest egg for a comfortable retirement. Even if that day is thirty, forty years away!

This is your guide to planning for your future, from day one.

When you’re done reading,  see how much you could save with mynestegg with our simple pension calculator, and discover how it can grow over time when you start your first pension early!

What is a pension?

A pension is a long term savings and investment plan that pays out when you reach a certain age. There are three types of pension that you can access once you retire - two of which you’ll pay into automatically, and one which needs you to be a little more proactive.

The State Pension

When you get your first payslip through, you’ll see a National Insurance contribution. One of the things that pays for is the state pension. Pay enough into it for 35 years and when you hit 67 (an age that’ll probably rise by the time you’re eligible) and you’ll receive a payment from the government. Currently it’s £221.20 per week - not much to live on, which is why you’ll also have…

The Workplace Pension

Unless you decided to opt out, your employer will have enrolled you in a workplace pension scheme. Every month, they’ll take a minimum of 5% of your wage, add in money worth a minimum of 3%, and put it into a pension they control. When you retire, the value of that pension is yours. But if you want to control your own future, you’ll need…

A Private Pension

A private pension puts you in charge. You decide who to save with, how much to save each month, where that money is invested, and the age you can withdraw it. If you’re serious about securing a comfortable future, you should have your own private pension alongside the two mandatory ones.

Looking for more information? - visit our knowledge hub’s Pensions Explained section.

How does your workplace pension work?

Your employer has to provide a workplace pension scheme. It’s the law. As long as you meet the following criteria, your employer will have to enrol you onto a pension scheme:

• You’re classed as a worker
• You’re aged between 22 and the state pension age (currently 66, rising to 67)
• You earn at least £10,000 a year
• You work in the UK

You can choose to opt out of the workplace pension, but it needs to be your choice. Your employer isn’t allowed to discourage you from joining the workplace pension scheme. 

Once you enrol, they’ll tell you the following:

• What type of pension you have
• Who runs it - and your policy number
• How much they and you will contribute per month
• How tax relief applies to you

Make sure you keep a note of that policy number, and the provider. It’ll come in useful when you change jobs.

Every month, you, your employer and the government will contribute to your pension.

Your employer will put in money worth a minimum of 3% of your wage
A minimum of 5% will be taken from your wages and put into the pension
The government will contribute an amount equal to the amount of tax relief you get

Your employer might also ask if you want to agree to a SMART or salary sacrifice. That’s where you give up more of your salary, but pay less in tax and National Insurance. It’s something to discuss with them. 

As you can see, even though a pension pot is slowly building up, a workplace pension doesn’t give you much input - or any control. If you want the freedom to set your own goals and work towards them, you’ll need a private pension.

Do you need a private pension?

You might think that with your workplace pension, topped up with the state pension, a private pension seems like a bit of an added expense you don’t really need.

Here are two numbers for you, both from the Pensions and Lifetime Savings Association.

• The state pension is around £11,500 per year.
• The minimum income that the PLSA recommends you have from your pensions - to live without a car, without foreign holidays - is £14,400 per year.

That means your workplace pension - that you have no control over - needs to pay out three grand a year just to have the minimum standard of living.

If you want foreign holidays, a good car, £100 a month to go to a nice restaurant - what the PLSA calls a “comfortable” retirement, you need £43,100 a year. Your workplace pension needs to deliver £29k extra. That means hundreds of thousands of pounds in a pot you don’t control.

Let’s look at it another way. Let’s say you put £100 into a private pension every month for the next 40 years.

£100. That’s not a lot. Go out for a few drinks twice a month. That’s £50. Add in a takeaway or two, and there’s another £50. That’s your £100.

Start saving when you start your first job, and your pension pot could be worth over £1,000,000 when you hit retirement age.

That’s right. You could retire as a millionaire.

Now £100 might sound like a lot if you’re not earning much, but as you get older, as your career grows, as you buy a house, pay off a mortgage, it’s the sort of sum you could put away without any trouble.

And the longer you leave it, the more it’ll cost you. You’d need to invest £250 per month if you started at 30, £650 per month if you left it until 40!

So what do you think? Do you need a private pension?

How do you set up a private pension?

Setting up a private pension is easier than you might think.

Here’s what you need to do.

1 - Find a pension provider

Of course we’ll say use mynestegg, but there are lots of pension providers out there. Some, like a mynestegg pension, you can set up in minutes online. Others might need you to have meetings with financial advisors. Some will charge a hefty management fee. We don’t, but it’s something to look out for.

2 - Provide the right information

We just need your National Insurance number, bank details and a handful of personal details. Other providers ask for more information, but a lot of that is so an advisor can justify their fee to give you some tips on how much you could - or should - put away.

3 - Make contributions

You can pay into a pension regularly through a direct debit, or make one-off contributions if you have a little extra. At mynestegg, we let you manage this through the website and our app, but some pension providers need you to ring up, fill out forms, that kind of thing.

4 - Manage your pension

Your provider might send you quarterly or yearly statements - huge dossiers explaining where your money has gone, how it’s grown, what they’ve done to justify their big fees. Others, like mynestegg for example, let you check any time using an app. Future security from the comfort of your couch. 

5 - Retire comfortably

You don’t have to wait until 66, 67, or even later to withdraw from your private pension. Most providers let you start withdrawing money at age 55. Early retirement - there’s another reason to choose private!

Looking to get started? You can create a pension in minutes with mynestegg.

How can a pension grow over time?

A pension isn’t a savings account. It’s a kind of investment. The money isn’t just sitting there, in a bank, making a percent or two each year. It’s invested into companies around the world.

If they go up in value, so does your pension.

It’s all a matter of risk. When you set up a pension, you might be asked about your attitude towards risk - and you’ll often be asked to choose between three kinds of risk profile.

Cautious, balanced, and adventurous.

That’s another benefit a private pension has over your workplace pension - you’re choosing your attitude!

But what does that mean? What’s the difference between the three kinds of risk?

Let’s say you’re looking at three companies to invest in:

Company A

Company A will probably grow between 1% and 2% next year.

Company A is low risk, suitable for cautious investors. It’ll probably grow, but not by a lot.

Company B

Company B will grow between 0.5% and 5%.

Company B is your balanced company. It could do worse than cautious ones, it could outperform them by more than double.

Company C

Company C could grow as much as 10%, or shrink by as much as 4%.

C is where investing gets adventurous. You could see a 10% return on your pension pot. Or it could get a bit smaller.

Stocks and shares pensions are invested across dozens, hundreds of companies. Your attitude to risk determines how your pot is split.

The amount your pension grows depends on the risks you take, and how well they pay off.

What happens to your workplace pension when you move jobs?

When you change jobs, your private pension will carry on as it has been. It just keeps chugging along, you keep contributing, it keeps growing in line with your risk profile.

Your workplace pension? That just stops. 

When you move jobs, your workplace pension just sits there. You won’t be contributing, your former employer definitely won’t be contributing. So the pot just sits there, going up and down with the market and interest rates, until the time comes that you can finally withdraw it.

If you’ve not been with an employer long, it could translate to as little as a few pounds a month.

So you can leave it, and never think about it again. Or, you could make that pension work for you by bringing it with you, combining it with your private pension - building an even bigger reward for the sensible choice you made.

That’s why we told you to make a note of those details your employer has to give you.

You can use them to transfer your pension.

Setting up your first private pension isn’t just a good decision because it’s putting you in control of your future. It’s a good decision because it can help you make the most out of the workplace pension you have to pay into.

With a private pot, if you change jobs, you can take what you’ve earned already and combine it with the pension you’ve been building yourself.

Drop all of that into your private pension as a lump sum, and suddenly you’re getting even closer to that average. That £100 a month over forty years which could provide a million pound pension pot.

Hopefully, now you’re clear on why your first job should also mean your first private pension. 

We’d love it if you set up that pension with us.