How is your pension different to a savings account?

Imagine your salary was the UK Median (£30,023). 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: £126.73

Your employers pension contribution: Savings £0.00, Pension £76.23

Savings (matching equivalent pension contribution): Savings £126.73, Pension £0.00

Total put away (monthly): Savings £126.73, Pension £202.77

Actual monthly cost to you: Savings £126.73, Pension £86.17 (after tax relief)

Take-home pay (after savings and pension contributions): Savings £1,900*, Pension £1,940*

 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 £45,622, Pension £72,966

Total after 30 years: Savings £53,163 (based on savings account growth rate of 1%), Pension £154,414 (based on investment growth of 4.6%)

Remember, investments can go down as well as up and you might not get back all the money you paid in.

And while we’re here, let’s take a look beyond the numbers...

Advantages of savings account

  • You have more ­flexibility and can access your money at any time

Disadvantages of savings account

  • Generally interest rates are lower, which means your money doesn't grow as much as it could with your pension
  • Infl­ation (the general rise in prices of things over time) is likely to outpace your savings which means your savings money can buy less
  • It's only your money, your employer does not contribute to the amount
  • Your money is paid into your savings account after you have paid tax, which means your take-home is less than if you put this into your pension

Advantages of pension account

  • Your employer also pays in to your pension which can make a huge difference over time
  • When paying into your pension, you receive tax relief on any contributions that you make
  • Generally the higher investment growth rate of your pension over time means that your money can keep up with or even outpace infl­ation
  • You can take a tax free lump sum from age 55

Disadvantages of pension account

You can’t access your pension money until you’re 55

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London EC3V 0RL.