Pension: Extra £100 in monthly contributions could boost pot by £15,288 over a decade

Budget 2021: Sunak announces pension lifetime allowance freeze

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While many have sadly felt the financial impact of the coronavirus pandemic, the dramatic lifestyle changes that came with the UK lockdowns have meant some managed to make savings within the past year. As the anniversary of the first lockdown on March 23 approaches, a new analysis has highlighted how saving slightly extra into a pension could impact one’s future, compared to saving in a cash account.

By mid-2021, additional savings during the pandemic is expected to reach £180billion, according to the Office for Budget Responsibility (OBR).

Interest rate on cash deposits are low right now, and it’s been suggested this could mean individuals may look to pensions which benefit from tax relief and being invested in the stock market over the long-term.

According to new analysis by Aegon, saving an extra £100 per month for five years in a pension could boost one’s pension pot by £7,565.

This compares to £5,462 saving in a cash account.

Over an even longer term, saving at this rate for 10 years could boost a pension by £15,288 over the decade, compared to £9,944 saved in a cash account.

Steven Cameron, Pensions Director at Aegon, commented: “The inability to spend as normal during lockdowns has meant some people have benefitted from additional saving every month.

“Figures show the extra household savings accumulated in the first three quarters of 2020 amassed to £148billion, and by the middle this year additional saving during the pandemic is expected to reach around £180billion – quite some stockpile of extra cash.

“The big question is how will it affect people’s future behaviour? The answer is dependent on how ingrained behaviour has become as to whether people stick to a savings regime or not.

“Maintaining a turbo charged rate of saving may be a big ask, and will only be tested once people have greater freedom to spend.

“This will be the acid test of how sticky lockdown habits have become.

“Behaviours and mindset are likely to change irreversibly with many of us thinking twice about the requirement for a daily commute.

“Aegon’s research shows that 60 percent of UK adults agree that major aspects of their life, such as working patterns and social life, will change forever as a result of the pandemic.

“People are already anticipating spending less on commuting and clothes for example, and a greater discretion on where the monthly pay cheque goes opens up the opportunity to boost long term savings through an ISA or into a pension.

“Aegon’s analysis show that saving £100 per month into your pension could provide a boost of £1,504 over the course of one year.

“Whereas, saving this in a cash savings account with an interest rate of 0.2 percent, could provide £1,178 in today’s money terms, with the eroding power of inflation over the year taking effect.”

Time can also pay, Mr Cameron said.

“The longer you can save more, the greater the difference,” he commented.

“Saving £100 per month for 10 years could mean you have £15,288 extra in your pension compared to £9,944 saving in a cash account.

“For those able to save an additional £500 a month over 10 years, this could be £76,440 extra in your pension compared to £49,700 in a cash account.

“Pensions benefit from government tax relief which means that £100 saved into a pension immediately becomes £125 if you’re a basic rate taxpayer.

“Additionally, by investing your money in a pension, you increase your chances that it will grow further over time, although it is important to note that this comes with a risk as you may get back less than you invested.

“You will also pay income tax at your marginal rate when you begin to take an income from your pension.

“The figures clearly demonstrate the benefits regular saving into a pension can make to your retirement funds over time, and also how much faster they could grow compared to sitting in cash.

“While it’s reassuring to have a healthy bank balance, the downside to holding more money in cash than you need, beyond an emergency fund, is stark.”

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