The simple financial habit you’ll want to nurture

Years before the Abbey National Building Society became part of a much larger organisation (Santander), it was a stand-alone business, highly ranked within the FTSE100 index.

It also embraced television advertising with a passion and came up with one of the most memorable financial ditties ever heard on British TV.

Everyone knew of the 'Abbey habit' because the building society's commercials always ended: "Get the Abbey habit, with Abbey National". I suspect this line was made even more memorable as the final word had three very distinct syllables as opposed to the two most of us use when saying 'national'.

My point is that the 'Abbey habit' did encourage people to save. Indeed, before my wife and I could get our first mortgage, which happened to be with Abbey National, we had to save with them for three years! Thankfully, we've always been savers, even before we met, independently mindful of the miracle of compound interest.

Which brings me almost seamlessly onto pensions.

I recall once being advised that as a general rule, you should contribute a percentage of your monthly salary to a pension equivalent to half your age when you started it. In other words, if you're 30 when you started your pension, you should contribute 15pc of your salary into it; if you were 20, you need only contribute 10pc and so on.

Of course, as your salary rises, your pension contributions will automatically increase in absolute monetary terms, although wherever possible, you should raise the percentage you donate.

In the USA, many employers operate a 'save more tomorrow' (not quite as snappy as the Abbey habit, is it?) scheme whereby employees agree in advance to have their pension contributions automatically increased each year. As most US employees grow used to a slightly higher pension contribution being taken from their pay each year, so they accommodate the increase into their regular spending habits and end up benefiting from significantly larger pensions as a result.

Ensuring there's enough in the pension pot when you decide to retire is a matter which people really start to focus on when they turn 45. As the years pass, so the intensity of focus grows, but for too many folks, the penny only begins to drop when time and their earnings capacity starts moving against them.

Research by the Association of British Insurers found that making the correct investment choices or asset allocation is far LESS important than pension contribution levels and length of time invested to the eventual payout. With auto-enrolment almost upon us, there's no absolute requirement to stick with contribution levels of 8pc of salary. Increase that to 12pc and your pension pot could benefit from a similar boost, ie by 50pc.

There are two other aspects of pension savings which are sometimes so obvious that they get overlooked. Both are worthy of note.

First, if an employer offers a pension and contributes to it on their employees' behalf, it's almost madness not to participate. Opting out of a company pension scheme is akin to accepting a voluntary pay cut. Indeed, instead of opting out, employees should contribute the maximum possible to such pensions because if their employer is matching them, the amount of money going into the pension pot effectively doubles.

Second, the tax breaks afforded pension contributions are extremely generous. All contributions are given an automatic 20pc boost (higher if you're a 40pc taxpayer) as soon as the pension starts. Most also allow a tax-free withdrawal of up to 25pc of the pension's value to be made when you reach the age of 55, though most company schemes don't permit this.

The pace with which the UK's auto-enrolment juggernaut has been rolled out has been hugely impressive, but people shouldn't be lulled into thinking that they have no need to supplement these compulsory savings.

Delaying starting a pension could, according to industry statistics, reduce the size of your pension pot by almost 20pc. It may not be as catchy as getting the Abbey habit, but getting the pensions savings habit sooner rather than later still makes enormous sense.

TAM Asset Management Ltd offer investors the opportunity to invest in a variety of Investment ISA portfolios from as little as £25 a month. For further details, please visit the MoneyMapp website.

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For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.