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