Is it worth starting a pension early?

scisor — Fri, 21 Oct 2022 13:21:02 +0800

It is worth investing early due to compounded returns, and managing risk.

If you start early, and markets and other assets have a bad period, you will only benefit from the recovery.

The question is, in which structure should you invest?

Pensions have the following benefits in many countries: A tax-efficient way to invest, as governments want to incentive savings

You can often take advantage of deductibles as a business owner.

In some systems, the company will add money as you contribute

The issue is, pensions have the following drawbacks:

Often you can’t access any of the money until you are 55, 60 or even 65, depending on the rules of the country and scheme. That leaves a lot of time for government rules to change

Most pensions are now defined benefit, which means you get the benefit of the underlying investments. If you have a final salary scheme, which is becoming rare, you also face the danger of losing your job and your pension if the firm goes bust. This gets complicated as sometimes safeguards exist to segregate the assets.

Pensions are very regulated. This can increase costs and lower investment opportunities, in some cases.

If you are an expat moving around the world, you might only be contributing for a few years into each countries scheme. In which case, opting out makes sense in many cases, if it is legal to do so.

Investing into other structures can sometimes make more sense, especially if you need liquidity.
Government pensions are very risky, as the state keeps pushing back the retirement date. Usually, we can’t opt out of this as it comes from taxes, but I would be weary about voluntary contributions.

So, it just depends. In general, it can make sense, if you look into the detail.

I certainly wouldn’t only invest into pensions though, and there are several reasons why you should opt out, depending on your circumstances.

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Is it worth starting a pension early?