Personal Finance

Why your 20s is the right time to worry about your retirement

Fresh-faced, optimistic, and full of idealism out of university at 22 years of age, the last thing I thought I’d be doing a few years later is planning my pension and my retirement.

But here’s why you should be doing the same.

Plan now

Remember that feeling of going to an exam completely unprepared? Well imagine that dread and multiply it by about 100 times when you come to retirement and realise that your savings are barely going to see you through a couple of years, your workplace pension which you faithfully paid into has attracted a 55% tax, and your kids have got their own families to worry about.

You might not think it now, but this is a potentially disastrous situation at a very fragile time of life.

Recent data suggests that you need at least £121,000 in savings plus a full state pension to be able to last 20 years of retirement. Unless you’re confident of achieving this, you must read on!

‘I can’t plan so far ahead though!’ I hear you cry; well I would argue that you literally cannot afford not to plan ahead.

Compound Returns

This is the main reason that focussing and planning in your 20s will reap great rewards. Simply put, compound returns have a snowball effect. It’s putting the money earned back into the pot to earn even more money, ad infinitum.

Let’s take a worked example:

If you saved £100 a month for 10 years, you would have £12,000.

If you put £100 a month into, say, stocks and made 8% a year, at the end of your 10 years, you would have £18,128.32.

That’s an extra £6,128.32 over 10 years due to the simple fact that you a) put the money into something that made 8% a year and, b) you put the profits back into the pot each year.

Imagine doing that over a 40-50 year working life, and potentially earning more than 8% a year (very possible). This is why planning in your 20s is important – you get time to maximise the compound return benefit.

It’s no wonder Einstein said:

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

Which one would you rather be?

So what’s wrong with my workplace pension?

Aside from shariah-compliance issues (one for our resident Islamic Finance expert, Ibrahim Khan), conventional pensions do not really offer much control or a very good rate of return.

I am a big advocate of people self-investing. This might appear scary, but learning about the topic is actually massively rewarding and the fact that you can control and keep a close eye on your investments is invaluable.

I always tell anybody who is interested enough to listen that you do not need to be a Wall Street banker to understand investments. Stocks and shares, probably the best long-term game when it comes to investments, is a case of picking companies whose future you are confident in who operate in industries you think have a profitable future. Yes, there’s much more to it in terms of fundamental technical analysis, but if you are bothered enough, and I think you should be, you can learn these things too.

There’s the opportunity to also diversify into other areas of investment besides stocks and shares – commodities (e.g. gold and silver) and property are always safe, popular bets, but you can also dedicate a small percentage of your portfolio to higher-risk, higher-reward strategies such as investing in startup companies or small-cap shares.

Why leave your future in the hands of somebody else when there is so much opportunity and learning material?

Time for action

Everybody is different, and everybody has different degrees of risk appetite. Some people might read this and want to opt out of their work pension altogether, others might wish to stick with it but think about alternative investments on the side, such as property. Yet others might think I’m talking a load of cobblers and will not have even got this far.

But if you have stuck with me, I am confident that deep down you are a savvy investor in the making.

In future blogs, we will look at investment options, but in the meantime, be sure to expand your reading and let’s explore thoughts in the comments section below!

As a related point, you should check out our detailed guide on self-invested pension plans here. This is particularly important if you have lots of past workplace pensions that you want to aggregate in one place. Pensionbee are one provider we particularly like who can help with consolidating pensions in one place all online.


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11 Comments. Leave new

  • I look forward to the suggestions you come up with. Excellent advice at a time when it needs to be said. Its valuable advice for all communities. I’d advovate an even earlier start to avoid student debt and create an autonomous mind set. Top stuff

  • Asalaamualaikum Brothers!

    Firstly I would like to thank you for the work that you are doing through this blog as this is something I needed being a 23 year old Muslim now working in the City.
    In regards to investments, I am very much interested in investing in property. I am quite passionate about it but the only thing holding me back is actually having the money to invest. As the conventional way is to get a buy-to-let mortgage from a conventional bank or using a similar mortgage from an Islamic bank with all the issues surrounding it. I was wondering if there are other avenues or if you have any advice on how I can commence on the property investing journey as you both have the financial and business knowledge as well as brother Mohsin with his family property business experience.



    • Ibrahim Khan
      March 9, 2016 9:36 pm

      ws Maruf,

      My personal position is that Islamic mortgages from the likes of Al Rayan are fine. There may be minor niggles with it – as explained in the previous blogs – but overall they’re the way forward for Muslims in the UK.

      The alternatives out there if you really want to avoid islamic mortgages are really:
      1. Invest in a different more liquid asset class – shares.
      2. Invest with lots of others (family&friends) so you can afford to buy in cash together.
      3. Invest in property through crowdsourcing property websites like housecrowd etc. They have lately been offering some very good yields and again theyre a small-cap way of getting a rung on the ladder.

      Also, if you’re working in the city, presumably you’ll be on a decent salary – so start saving for a deposit, inshAllah you’ll be there soon!

      • Jazakallah brother for a quick response. I will look into Al Rayan banks buy to let mortgage and see what they are offering. Just wondering if you personally have had experience using the al rayan mortgage for buy to let?

    • Ws Maruf,

      Thanks for taking the time to comment. I know Ibrahim has replied, but I thought I would offer my humble thoughts too.

      Firstly, I would just like to say that I think you’re at the right age to be thinking about the type of investment you’re thinking about. You simply cannot rival the advantage that getting started early can have. I have spoken to numerous seasoned investors and business people who have done very well for themselves, but one thing they regret is not getting started earlier.

      Secondly, in relation to the mortgage issue. You can check out Ibrahim’s articles on Islamic mortgages. His conclusion, as he has hinted in his comment, is that they are basically ok. I also take that view in light of the alternatives that are available. Just bear in mind, however, that Al Rayan do have a minimum 90k property value for BTL mortgages. That might be fine depending on the property you’re considering, but it’s worth noting anyway.

      Thirdly, have you considered the upcoming government changes to buy-to-let investors? Effectively, it means a decrease in tax relief and the compulsion to pay stamp duty where it might not have been compulsory before. It might be worth taking these into consideration before you opt to invest in property.

      I am increasingly of the opinion (although still yet undecided) that commercial property is a far more attractive investment than residential. I think first-time investors tend to adopt for residential properties purely for familiarity purposes if they’ve not been involved in business before. But commercial leases, as a rule, tend to be far more favourable to the landlord than residential leases are. This is also something for you to consider.

      Lastly, whilst property is traditionally a solid investment, if your capital is low, you should consider alternative investments. The advantage you have with young age is that you can afford to take a few more risks with your capital because you have ample time to make it all up. I would not advise this for someone 10 years away from their retirement, for example, but getting started early can mean more lucrative returns, not just because of time advantage, but because you can bear more risk. To that end, investing in the stock market might be worth considering.

      You should also consider the new crowdfunding options to invest in property. I have seen some that offer some seriously good returns considering the minimal effort. I cannot vouch for these websites though having never used them, but it is certainly something I am considering for family members who are less averse to risk.

      Keep your eyes peeled for more articles, I will be elaborating on some of the topics I have touched upon here.

  • Assalamualaikum,

    Jazakallah khayr for publishing this post as it gave me the push I needed to explore saving options as a young graduate, when I might not have done so otherwise!

  • Thaqib Moosa
    April 14, 2017 3:29 pm

    This is really good and I fully agree with taking control over your investments. Sure you might not be as savvy initially but that is definitely a worthwhile skill to develop and more importantly you have transparency and control over where your money goes and how you invest it. There is one thing though which has not been considered in this article.

    The issue is as follows:
    Most corporate pension schemes come with a company contribution at least equal to the value you are putting in or more. At my workplace this is 8% from them for 8% from you.

    Let’s say your monthly income (before tax) is £2500 (£1973 after tax). Then your pension contribution is £100 and your company pays in £200 so you invest £300 into it. You also now pay tax on £2400 rather than on £2500. After tax this becomes £1905).

    So for £68 cost to you, you have paid £300 into the scheme. My workplace only has one Halal scheme option (The HSBC Amanah fund) and unsurprisingly that fund seems to be quite common. The rules are pretty good in that they don’t invest in interest (if that is ever truly possible), gambling, alcohol, or pork-related businesses. At the moment they are investing in Apple, Exxon etc.

    I have many issues with a scheme like this such as that it is marketed as set-it-and-forget-it. Most people exercise very little control over their money, and Muslims really have no option other than the very few Muslim funds out there. The scheme also takes a percentage of the profits as commission in addition to a fee for administering the fund and administration costs (and possibly a whole bunch of other costs). You are also not allowed access to the fund until you are a certain age and if you cash out before that they then take another fee.

    Despite all of these problems, the 8% contribution from the company (basically getting paid extra), which you would lose if you didn’t opt for the scheme, means that a majority of the company still take the option. Do they make a sound economic choice?

    • Mohsin Patel
      April 14, 2017 3:54 pm

      You raise an interesting point, and you’re right that this wasn’t considered in this article, primarily for purposes of brevity. I’ve discussed your point above with a few people since writing the article, and to be honest, I do broadly agree with you. You are right to say that given the level of employer contributions effectively doubling (or better) your money going into the pension pot, it makes sense to contribute to a pension because it would be very difficult indeed to gain 100%+ on any given sum yourself.

      I’m slightly confused on your calculations though. Let’s take your example of a £2500 gross salary. An 8% contribution is £200. Did you mean to say that you as the employee contribute 4% (£100) and your employer contributes 8% (£200), resulting in a £300 entry into the pension pot? If so, that makes sense to me, but if not you’ll have to explain it again as you’ve lost me a little there!

      But yes, in short, if your employer is matching or bettering your contributions, it does make sense to go with a workplace pension. The issue, as you rightly point out (and partly why I didn’t want to explore it in the article) is the issue of actually contributing to a potentially haram pension. There are sharia-compliant pensions out there, so I suppose they would be the first port of call. But if they aren’t there, this poses a problem.

      As for the costs, they are, unfortunately, part and parcel of the profession. To be honest, personally, the ideal situation would be that I could get the tax break from a pension contribution as well as the employer matching/bettering my contribution, but be able to put it into a SIPP where I would manage it myself. Frankly, I don’t see why that isn’t an option; I suspect, however, that this whole move from the Government towards private pensions is, at least in part, influenced by the big hedge funds who will be seeing huge influxes of money now coming in due to the changes. They’re making it inevitable that most employees in this country will be contributing to their pension, of which there are a few very well-known companies who will be benefitting most from that.

      Perhaps it’s time to call for a similar offer to be made available for contributions to a SIPP?

      I will hopefully explore all of this in an article on pensions soon. If there are any other articles you’d like to see, please do let us know via the contact form.

  • Aoa. Late on the scene here may Allah reward you for such a fantastic website. Do you know much about the NHS pension scheme and whats your opinion on it? I’ve been working and contributing to it for 13yrs and if opt out I apparently lose all of it. I haven’t looked yet to check this. Any thoughts?
    JazakumAllah khair


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