Why adding your savings to your pension could mean your money goes further

14th June 2021

Seven in ten (72%) UK adults have saved money due to the pandemic, but just a fraction plan to add these savings to their pension, according to an LV= survey. While considering short- and medium-term goals is important, making a one-off pension contribution can mean your money goes much further.

Average pandemic savings are almost £5,500 per household

Reduced costs over the last year have meant some households have been able to put the money they’d usually spend on commuting, childcare, or going on holiday into their savings account. On average, these households have been able to put away £5,500 in the last year. Some 8%, the equivalent of 4.4 million households, have saved over £10,000 as a result of Covid-19.

If you’re among the pandemic savers, what do you plan to spend the money on?

While some savers will use the money to cover essentials and improve their financial security, many plan to use it to enhance their lifestyle now. The survey found the most popular plans were:

  1. Pay into savings or a Cash ISA (28%)
  2. Book a holiday (21%)
  3. Home improvements (19%)
  4. Essential everyday living costs and bills (13%)
  5. Essential home or car repairs (12%)
  6. Non-essential everyday living, such as days or meals out (11%)
  7. Pay off debt (10%).

In contrast, just 5% said they’d add their savings to their pension. Even if retirement is some way off, adding a one-off lump sum to your pension could be beneficial and, in fact, could mean your money goes even further.

4 reasons to add your savings to your pension

1. You’ll receive an instant boost from tax relief

When you deposit money into a pension, the government will add some of the money that you would have paid in tax to your retirement savings. Tax relief is paid on your pension contributions, both regular and one-off payments, and the level depends on the rate of Income Tax you pay. A 20% tax relief provides an immediate boost to your savings. If you’re a higher- or additional-rate taxpayer, you can claim more.

2. A pension allows you to invest tax-efficiently

If you’re saving for retirement, a pension is a tax-efficient way to do so. Your money will usually be invested and can grow free from Income Tax and Capital Gains Tax. Instead, you will pay tax when you withdraw money as part of your income in retirement.

3. The compounding effect can help your money grow faster over time

As your money is invested for the long term, you have an opportunity to benefit from the effects of compounding. This is where investment returns are themselves invested to generate additional returns. Over time, it can help your money to grow faster. The longer your money is invested, the longer you’ll have to benefit. However, you need to keep in mind that your savings won’t be accessible until you reach pension age; currently, this is 55 and will rise to 57 in 2028.

4. It can help you create the retirement lifestyle you want

Your retirement lifestyle might not be something you’ve thought about yet, but to achieve the lifestyle you want it’s important to plan early. Even if retirement is decades away, building up your pension now means you’re taking steps to reach goals in your later life, whether you want to retire early, spend time travelling, or are looking forward to spending more time with family.

Is a lump sum pension contribution right for you?

While there are benefits to adding your savings to your pension, it’s not the right option for everyone.

If, for example, you don’t have an emergency fund to fall back, putting the savings in an accessible account can boost your financial security. Or, if your regular pension contributions mean you’re nearing either the pension Annual Allowance or Lifetime Allowance, a one-off contribution could mean an alternative is more suitable. As a result, you should consider your circumstances and goals before depositing money in your pension.

Please contact us to discuss how you can use your pandemic savings to help you achieve goals, whether you’re thinking about retirement or short-term plans.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.