Why it might be better to delay saving for your retirement
We are advised to put aside as much as we can as early as possible. But is that always sensible?

When should you start saving for retirement and how much should you put by? The conventional answers to these questions are as soon as possible and as much as you can afford. But the conventional answers may be wrong, according to new research by the Institute for Fiscal Studies (IFS).
It is certainly true that the laws of compound interest mean money invested at an early age will work harder to deliver you a decent retirement income. But saving for a pension doesn’t happen in a vacuum. Money you move into it isn’t available for anything else. And that is potentially problematic.
Debts take precedence
The IFS’s modelling argues that once you take into account all your financial circumstances – rather than thinking about pensions in isolation – saving early often doesn’t make economic sense. Indeed, it would be much more rational to do the lion’s share of your retirement saving later in life.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The explanation for this is straightforward. In your 20s and 30s, it is likely your income will be lower than later, as your career progresses. It is also likely that your outgoings will be higher.
You may be repaying student debt or covering the cost of a mortgage. You may have children. You may still be accumulating the possessions it takes time to acquire – furniture, for example.
Later, by contrast, these pressures may ease. Hopefully, you are earning more. And as children leave home and debt is repaid, your disposable income should rise further.
Spreading pension income equally across these two periods is irrational, the IFS argues. To make pension contributions early in your working life may require sacrifices and compromises that outweigh the benefits of saving. Equally, when your financial position improves, you may well be able to comfortably afford much larger pension contributions.
On this basis, the IFS’s analysis suggests a typical graduate who has two children should do at least two-thirds of their pensions saving after the age of 45. There is, of course, no such thing as a typical graduate: everyone’s circumstances will vary. But for all those people beating themselves up for failing to maximise their pension saving as soon as they leave university – which is what pension experts have always told us to do – this analysis makes comforting reading.
Join occupational pension schemes
There are a couple of caveats to bear in mind. Firstly, as the IFS points out, if you have the option of joining a pension scheme at work, doing so will qualify you for pension contributions from your employer.
Since you don’t want to miss out on these, it makes sense to join the scheme and pay the minimum contribution required to get the employer’s top-up. Doing most of your pension saving later in life does not mean doing no saving at all earlier on.
The other key point to bear in mind is that leaving pension saving until later does carry a risk. If you fall ill or lose your job in your 50s, you may find yourself unable to make up for the saving you opted out of earlier on.
For this reason, where you do have the ability to make higher pension contributions earlier in your working life, it is a good idea to do so. You can never be sure how things will pan out.
Nevertheless, the IFS analysis stands as a general principle. Compound interest is a powerful concept that can supercharge the value of savings made early. But the standard advice to take advantage of this overlooks the realities of people’s lives.
The IFS makes one final point. Its analysis also has implications for the way the government intervenes in pensions policy. At present, the minimum pension contributions required under the auto-enrolment pension system are the same whatever your age. This is also the case when it comes to the tax relief you can claim on pension contributions and the amount that the tax system allows you to contribute each year.
Why not rethink those rules to reflect the way people actually save? Lower minimum contributions earlier on, for example, might help more people join pension schemes, even if you require them to pay more later. Similarly, higher pension allowances for older savers would help people catch up.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
-
Is Nvidia overvalued?
Nvidia is the world’s largest company and the first ever to be worth over $4 trillion. But despite being the undisputed leader in artificial intelligence, can it justify this valuation?
-
Millions of state pension records ‘set to be deleted’ – putting thousands at risk of never getting their money
Thousands of families could miss out on money owed to them if the government deletes historic state pension records.
-
'Gen Z is facing an AI jobs bloodbath'
Opinion It has always been tough to get your first job, but this year, it's proving tougher than ever. AI is to blame, says Matthew Lynn
-
Beazley: a compelling specialist insurer
The insurer Beazley is unusually profitable at present, and that looks set to continue. The stock is also a valuable portfolio diversifier, says Jamie Ward
-
Is Britain heading for a big debt crisis?
Opinion Things are not yet as bad as some reports have claimed. But they sure aren’t rosy either, says Julian Jessop
-
What is the Enterprise Investment Scheme and should you have one?
The Enterprise Investment Scheme is tax-efficient and potentially lucrative. Taking a chance on the scheme could trim your family’s IHT bill, says David Prosser
-
What are wealth taxes and would they work in Britain?
The Treasury is short of cash and mulling over how it can get its hands on more money to plug the gap. Could wealth taxes do the trick?
-
Self-employed? Start saving for your pension now
Britons who are self-employed have neglected to build up their retirement fund. They must act now
-
Why is Britain's industrial base crumbling?
Opinion More and more factories in the UK are closing, and the government doesn’t seem to care. What’s going on?
-
Scotland's former first minister Nicola Sturgeon leaves behind a toxic legacy
On the left, Nicola Sturgeon is seen as something of a political hero. That makes sense… but only if you exclude her actual record in office