In a surprising trend, recent research has revealed that savers in the UK are almost three times more likely to invest their extra cash into a bank or building society account rather than into a pension scheme. A survey conducted by Standard Life found that 65 percent of individuals with a savings account planned to allocate their spare cash to savings, while only 22 percent intended to contribute to their pension funds. This article aims to shed light on this issue and highlight the benefits of prioritizing pension savings over traditional savings accounts.
The Attractiveness of Traditional Savings Accounts:
Unsurprisingly, the allure of savings accounts is understandable considering the recent rise in saving rates, which have reached their highest levels in years. The prospect of earning interest on their savings is enticing to consumers. However, it is crucial to recognize that increasing one’s pension savings can provide numerous additional advantages that should not be overlooked.
The Tax Relief Advantage:
One major advantage of allocating extra funds to a pension account is the tax relief provided by the government. Depending on one’s income bracket, this relief can range from 20 to 45 percent. To illustrate, a basic-rate taxpayer who contributes £100 to their pension would only need to make a personal contribution of £80, with the remaining £20 coming from tax relief. This equates to an immediate 25 percent return on the initial investment, courtesy of the government.
The Lock-In Period and Delayed Access:
It’s important to be aware that pension savings require individuals to lock up their money until they reach the age of 55 (or 57 from 2028) to access the benefits. While this may be perceived as a downside, it is worth appreciating the long-term nature of pension savings. By locking away money now, savers are preparing for their future when they may be more reliant on their pensions, making this delay in accessing the funds a manageable trade-off.
The Impact of Inflation:
Helen Morrissey, Hargreaves Lansdown’s head of retirement analysis, emphasizes the need to consider pensions as part of a well-rounded financial strategy. Although interest rates on savings accounts have risen, inflation remains high at 6.8 percent. Over time, the purchasing power of cash savings can be eroded by inflation. Therefore, it is crucial to allocate funds towards pensions once a comfortable savings buffer has been established.
While it’s understandable that savers are attracted to the higher interest rates offered by savings accounts, it is crucial to consider the long-term benefits of allocating extra funds to a pension. By prioritizing pension contributions, individuals can take advantage of the tax relief for significant savings growth. Additionally, by accounting for inflation and securing a reliable source of income for retirement, savers can ensure long-term financial security. It is recommended that individuals establish an emergency savings fund and then divert extra money towards a pension plan to maximize their future financial wellbeing.