If your money was only held in cash savings, inflation could eat away at its value, over time.
Investing gives your pension money the chance to at least keep pace with inflation, hopefully with some extra growth on top.
Investing comes with a risk of loss, too, which is greater than the risk of losing money held in a savings account. But the hope is that despite fluctuations in value, the overall growth trend for your pension pot will be higher than the relatively low interest that savings accrue – especially because of the value-eating effects of inflation.
So how is your pension different to savings?
Watch our video or download our handy infographic to find out more.
Video Transcript
Do you know what makes your pension different to a savings account?
A pension is like a savings account you can’t touch for decades, right? Not quite. Pensions and savings are worlds apart.
For starters, when you pay money into your workplace pension, your employer tops it up too. And the Government pays in as well… yes, that’s free money!
All designed to reward you for doing the right thing by setting money aside for your future.
Unlike a savings account, where your money sits around doing not very much, your pension cash is invested.
And because you can’t use this money until you are at least 55, it has plenty of time to grow.
So, you may feel you can take more risk with your pension and invest in things that could give you a higher return than a savings account… like company shares.
This is important, because if your money stays in savings, the chances are it won’t grow as much as it could in your pension.
It could even lose value if inflation is higher than interest rates. Let us explain what we mean by that…
Inflation is a general rise in prices over time, which can be bad news for your savings because as prices rise, the things you buy cost more. If this happens more quickly than the rate of growth of your savings, you won’t be able to buy as much.
Whereas investing in a pension gives your savings the chance to at least keep up with inflation, with the possibility of some extra growth on top.
That way, when you’re ready to stop working, your pension could have the power to pay for the lifestyle you want… what’s not to like?
Remember, investments can go down as well as up and you might not get back all the money you paid in.
How is your pension different to a savings account?
Based on relief at source*
Imagine your salary was the UK Median (£31,285). Let’s take a look at how your monthly pay packet would look in a savings account vs your pension...
Savings vs pension
Your pension contribution (5%): Savings £0.00, Pension: £130.35
Your employers pension contribution: Savings £0.00, Pension £78.21
Savings (matching equivalent pension contribution): Savings £130.35, Pension £0.00
Total put away (monthly): Savings £130.35, Pension £208.56
Actual monthly cost to you: Savings £130.35, Pension 104.28
Take-home pay (after savings and pension contributions): Savings £1,947.64, Pension £1,973.71 (after net pension contributions, tax and National Insurance deductions)
While your money could sit in a savings account gathering interest and doing not very much, after 30 years invested in a pension, it could look like this…
Total contributions over 30 years: Savings £46,927.50, Pension £75,084
Total after 30 years: Savings £64,000 (based on savings account growth rate of 1%), Pension £93,000 (based on investment growth of 4.6%)
We have assumed a fund management charge of 1% and an inflation rate of 2%. Please note these figures are for illustrative purposes only and are not guaranteed.
*Relief at source means your contributions are taken from your net pay (after your wages are taxed). Then your pension provider automatically claims tax relief for you from HM Revenue & Customs (HMRC), adding the basic tax rate of 20% (different rules apply for Scotland) to your pension contributions.
Remember, investments can go down as well as up and you might not get back all the money you paid in.