In the early stages of your career, retirement can feel like a distant concern, something to think about “one day”. When you are likely to be climbing the career ladder, paying rent or a mortgage, keeping up with social plans, and possibly starting a family, it’s easy for retirement planning to take a back seat and fall to the bottom of the priority list.
However, retirement can last a very long time, and it’s crucial not to overlook your future financial security. Relying solely on a workplace pension or the State Pension may not provide the retirement lifestyle you expect. For example, according to a research by The Retirement Living Standards, the average annual income for UK pensioners is £14,664, whereas a “moderate” lifestyle requires around £31,700 annually after tax, and over £43,000 for “comfortable”. This represents a considerable shortfall for the average person, and it is having consequences for people’s standard of living, right now.
Ironically, the fact that retirement feels so far away is exactly what gives you the greatest advantage at the present moment. Time is the most powerful tool for building wealth; small, consistent contributions today can compound into significant financial freedom later on. This article explores why it pays to start investing for retirement early, how rising living costs and longer lifespans make preparation more essential than ever, and how tools like a Self-Invested Personal Pension (SIPP) can help you take control of your financial future. We can begin by looking at some of the facts that paint the picture more clearly.
The rising cost of living
In 1985, a pint of beer cost 77p and a loaf of bread cost 48p on average in the UK. For long-term investors, inflation is an unavoidable factor to consider, as everything from groceries to energy tends to cost more year after year. Over decades, the contrast is stark. Due to rising prices, this means that your income, and therefore the size of your pension pot, must rise alongside inflation to maintain the same standard of living.
As we noted above, an individual needs around £43,900 per year for a “comfortable” retirement in 2025. To sustain that for around 25 years, you’d be looking at a pension pot that could easily exceed £1 million. Now, if we assume there is a low level of inflation at 2% for the next 40 years, this would mean that a 25-year-old today is going to need at least £3 million in their pension pot to retire at age 65 and live a comfortable retirement for 25 years due to the effect of inflation, according to an analysis by Rathbones Group. It’s also vital to be aware that inflation levels could be higher, as current levels are.
Greater life expectancy
We are now living longer on average than ever before. Advances in healthcare, diet, and lifestyle mean that for many people, retirement could easily last 25–35 years. According to the Office for National Statistics, a 30-year-old today can expect to live to around 85 if they are a man, and 88 if they are a woman. This is great news as it means more time to travel, explore passions, or simply enjoy your independence. But it also means your money will need to last longer. Starting your retirement planning in your 20s or 30s gives your investments the best chance to grow in line with your life expectancy. Even modest early contributions can make a significant impact thanks to compound growth.
The power of compounding: why time is your secret advantage
Reaching retirement with a shortfall in funds is a difficult situation to be in; it might mean being forced to cut back on dreams like traveling the world, supporting grandchildren, or pursuing long-held hobbies.
This financial shortfall is avoidable, and the key lies in harnessing the power of compound growth. In simple terms, compounding means your investments don’t just earn returns on the money you put in, they also earn returns on the growth those investments have already made. Over time, this creates a snowball effect, where your money grows faster and faster the longer it’s invested. By starting early, you give your investments more time to compound, helping to close the gap between what you’ll need in retirement and what you might otherwise have.
To demonstrate, consider three people who each contribute £100 per month into a SIPP, assuming a 7% average annual return and retiring at 65.
| Investor | Starting Age | Years Investing | Monthly Contribution | Total Contributions | Future Value at 65 | Interest Earned |
| Alice | 25 | 40 | £100 | £48,000 | £262,481 | £214,481 |
| Frank | 35 | 30 | £100 | £36,000 | £121,997 | £85,997 |
| Julia | 45 | 20 | £100 | £24,000 | £52,093 | £28,093 |
These figures highlight the exponential impact of time on your investments. Alice, by starting at 25, benefits from 40 years of compounding, turning her £48,000 in contributions into over £262,000, meaning interest alone accounts for more than 80% of her final pot. Frank, delayed by just 10 years, ends up with less than half that amount despite contributing £36,000, as his money has fewer years to grow. Julia’s even shorter timeline results in a nest egg that’s only about one-fifth of Alice’s, with interest making up a smaller proportion.
The lesson is clear: awareness of compounding’s power can transform modest early efforts into substantial wealth. If you’re in your 20s or 30s, the “secret advantage” is yours to seize right now; every month delayed is potential growth lost.
Investing efficiently: the benefits of a SIPP
While the principles of early planning and compounding form the foundation of a secure retirement, selecting the right investment vehicle can amplify your efforts exponentially. A SIPP offers a compelling portfolio solution for UK residents, blending tax efficiency, flexibility, control, and personalised suitability to help you optimise your savings.
On tax efficiency, SIPPs shine with government-backed relief: basic-rate taxpayers receive an automatic 25% uplift (turning a £80 net contribution into £100 in your pot), while higher-rate and additional-rate taxpayers can claim extra relief, up to 20% or 25% respectively. This is literally putting the tax you’ve paid back into your pocket. Investments in a SIPP grow tax-free from capital gains, dividends, and income tax. From age 55 (rising to 57 in 2028), you can access 25% as a tax-free lump sum (up to a lifetime allowance of £268,275), with the remainder taxable as income upon withdrawal. This structure not only minimises tax drag but maximises compounding over decades.
With unparalleled control, a SIPP empowers you to curate your portfolio from a vast array of assets, including shares, bonds, ETFs, investment trusts, and commercial property, far beyond the limited funds in standard workplace pensions. This hands-on approach lets you align investments with your risk appetite, ethical preferences, and consolidating old pensions simplifies management and potentially cuts fees.
This high degree of control, however, brings the question of suitability. A SIPP is best for those comfortable with making their own investment decisions. For those who want the broad SIPP choice but prefer guidance, many providers now offer hybrid solutions, such as ready-made or actively managed portfolios, where algorithms, like those from services such as Moneyfarm, can help ensure your chosen portfolio remains suitable for your risk profile and goals, offering a middle ground between full self-investment and a traditional managed fund. The SIPP structure ultimately gives you the power to choose the investment path that is right for you.
By acknowledging the realities of rising living costs and greater life expectancy, and by acting early, you put the power of compounding to work for you. Choosing a SIPP provides the tax-efficient wrapper and flexible control to maximise the growth of your investments over the long term.
Don’t let retirement remain a distant concern. Start small, stay consistent, and unlock the financial freedom that an early start and smart planning can provide. As always, our knowledgeable team of consultants is here to provide expert guidance on investing in pensions, and to address your unique circumstances and goals. So please do not hesitate to contact us if we can lend a helping hand.
Please remember that when investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. The views expressed here should not be taken as a recommendation, advice or forecast. If you are unsure investing is the right choice for you, please seek financial advice.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
