Three ways that pensions are a money multiplier
This article explains the main reasons why saving into a pension can be so rewarding over time.
Whether it’s winning every piece of gold on The Traitors or finding a twenty quid note on the side of the road, an unexpected windfall usually generates a bit of drama.
The levels of excitement around pensions, however, are generally not so high.
Which is crazy really. Because pensions offer one of the best opportunities to generate extra money, on top of what you’ve earned.
Pension savings are a kind of money multiplier, for a number of reasons.
You get tax relief
Pensions are often described as one of the most tax efficient ways to save. Why is this?
Assuming you pay income tax at a standard rate, for every £100 that you put into your pension pot, only £80 has come from your take home pay.
If you’re a higher tax rate payer, for every £100 you put in your pension pot, only £60 has come from your take home pay.
Currently you can contribute up to £60,000 to your pension each year in this tax efficient way.
Your employer adds money
This is money on top of what you earn as salary.
If you are employed, at least 22 years old and earning 10K or more a year, you will likely be auto enrolled in your employer's pension scheme. This means your employer will be contributing the equivalent of at least 3% of your salary to your pension, on top of the contributions you are making.
Example.
You're enrolled in your workplace pension scheme, and this week you earned the national average weekly wage of £682. Your employer contributes 3% to your pension. Effectively you're earning £702.46 - because your employer is putting £20.46 extra into your pension pot.
So as Martin Lewis puts it, opting out of your work pension is a bit like turning down a free pay rise.
Your money is invested to grow
Pensions are invested, and pension fund managers are seeking to increase the value of your investments over time.
So your pension is not just a savings account. There's no guarantee - investments can go up or down as well. But in the long term, pension investments have tended to be efficient at growing money over time. (Though of course what has happened in the past, doesn't predict what will happen in the future. There is no magic crystal ball for any of us.)
For all these reasons pensions are a unique and powerful way to build wealth during your working life
Of course, it's money that's locked away for a while - for most people that's at until you're at least 55 years old (rising to 57 in 2028). It's important to balance the needs you have now with those you may have in the future.
Increasing contributions when we can afford to may give us a greater chance of maximising returns for later life.
If you haven’t checked in recently on how your pension pot is doing, why not take a look?
It’s easy in the Cushon app. See what you’re projected to get, and review how much you are putting in.
FAQs - reviewing your contributions
It's quick and easy to do in the app.
You can see the value of your pension pot on the home page of the app - which is displayed once you log in.
Click on the pension pot you want to review and you will see a few options:
Total contributions - at the bottom of this screen you can see your total contributions so far to this pot.
Click on this to see:
Details of the % proportion of your salary you are contributing to your pension pot each month
A break down of your contributions:
What you pay in each month
What your employer pays in each month
Total amount arriving in your pot each month
There’s a simple way to do this in the Cushon app for most Members.
Open the app
Select your pension pot
Click on Total contributions at the bottom of the page
On the Contributions page you can make changes using the Change Contributions button for
Here you can increase and decrease your contributions without any paperwork required.
If your employer has opted for this feature to be managed via the benefits portal at your workplace you will need to check with them how to change the amount you are paying in.
Remember there is a legal minimum contribution you are required to make to your pension if you are opted in to a workplace pension. The combined contribution from you and your employer must total 8% of your salary. Your employer must contribute at least 3%.
There is a legal minimum contribution you are required to make to your pension if you are opted in to a workplace pension. The combined contribution from you and your employer must total 8% of your salary.
Your employer must contribute a minimum of 3%. So, for example, if your employer is contributing 3% your minimum contribution must be 5% of your salary.
Some employers will contribute more, which means that your minimum contribution might be less than 5%.
Some employers match their employees' contributions. So for example, if you are paying 5%, your employer might match it with 5%, putting you at a combined contribution of 10%. In this example, you could not reduce your payment to 3% because your employer would also reduce it to 3% and this would make your total contribution only 6%, which is below the legal limit.
The Cushon app can help you think about your pension contributions in context, and help you understand what you might need.
Open the app
From the home page click on your pension pot
You will see helpful information about:
Performance - how your pot has grown since you set the pension up. This is where you can see a graph showing your pension investment performance.
Click on the Projection tab here to see how it will look over time. You can change the time frame using the slider at the top of the screen
Target - the amount you are likely to have in your pot at your target age - the age at which you expect to start accessing your pension money.
Want to know more? See Target age: how we invest your money over time.
From here you can compare how changing your target from the default (65 years) to a different age might affect your money.
Investment - this tells you which investment strategy is guiding the investment of the money in your pension pot. The default is the Cushon Sustainable Investment Strategy.
Want to know more? See Where we invest your money.
We know it isn’t easy for everyone to save right now. But even if there’s no room in your current finances to pay in more, it’s good to know how things stand with your pension.
Knowing where you are now is a big help for future planning. And when you find you have more flexibility in your finances, remember that saving into your pension can be one of the most effective ways to invest in your future.
Yes. When you change what you are paying into your pension the Cushon app will show you how much you are forecast to receive in the Projections tab.
Setting the right levels of contributions is all about your circumstances and what you are aiming for later in life.
You may be aiming for a life of luxury beyond work, where the fun never stops. Or perhaps the goal is just keeping the basics covered, with a part-time job into your senior years.
Along with your health, your current finances and how reliant on your pension money you think you will be later on, these considerations influence how much you need to save into your pension.
As a rule of thumb, many people aim to manage with about two-thirds of their working income when they retire.
Take a look in the Cushon app and you can see:
How much you’re contributing now
How much you’re projected to get when you’re 60, 65 or 70
This communication is for information purposes only and is not personal advice. The value of investments can fall as well as rise, and you may get less than the full amount you invest.
Article by
NatWest Cushon Explainer
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