Pensions aren’t just something to consider once your child enters the world of work; they are a great topic to explain to young adults early on so they understand how to plan and save for the retirement of their dreams.
1. Start with real life examples
A great way to introduce your child to pensions and retirement is with real-life stories from people you know. Your child could talk to an older relative about their experience of saving or their retirement lifestyle. This is a great way to bring the realities of pension planning to life.
Also, consider sharing your pension plans with your child, including how long you’ve been saving and how much you contribute. You can make the topic engaging by sharing your plans for that stage of your life.
2. Cover the basics together
Once you’ve introduced your child to the topic of pensions, you could discuss some essential concepts with them, including:
- The different kinds of pensions (state, work and personal) available.
- The age at which individuals begin receiving their pension.
- How National Insurance contributions are needed to qualify for a full state pension.
- How to calculate how much to save for a comfortable retirement.
- That you can’t access pensions in the same way you can access savings accounts.
You can also learn more about pensions with our handy pension starter guide.
3. Explaining how interest works
If your child is already familiar with the concept of interest in savings accounts, you can explain how this interest accumulates over the years within a pension account – a concept known as compound interest.
You could even explain the “snowball” analogy used by Warren Buffet, one of the most successful investors ever. The idea is that pushing a small snowball down a hill continuously picks up snow. When it reaches the bottom of the hill, it’s huge. This is because the bigger it gets, the more snow it can pick up each time it rolls. This way of thinking applies to pensions because they are a form of investment; you earn interest on the money you’ve saved and the interest you’ve received along the way.
4. Encouraging a balanced approach
When discussing the concept of pensions and retirement, it can be helpful to explain how to balance long-term retirement planning with short-term financial goals. Encourage your child to think about setting aside some of their earnings for significant purchases like buying a house or a car and ensuring they have a decent pension.
5.Junior pensions and other ways of saving
You might be surprised to discover that pensions aren’t just for adults; there are pension plans designed specifically for children, too. These can be an excellent way to invest in your child’s future, allowing pension benefits to accumulate over their lifetime, even before they enter the workforce.
Another savings option to explore is the Individual Savings Account (ISA). Offering tax-free savings of up to £20,000 per year (for 2024/25), ISAs – including Junior ISAs – provide a variety of choices to suit different objectives.
Encourage your child to research these options together and discuss their long-term financial goals. By fostering an early understanding of the value of saving, you can help them develop responsible financial habits that will serve them well throughout their life.