Two-Thirds of Pension Pots From Growth
More than half (65%) of the value in a typical pension pot comes from investment growth, according to Standard Life research. This might come as a surprise, as only one in four (25%) people recognize investment growth as the primary driver of their pension’s final value. To put this into perspective, if you have a £100,000 defined contribution pension, around £65,000 of that pot comes from investment growth.
Pension Growth: More Than Just Contributions
The retirement specialist analyzed UK government figures and found a revealing breakdown of where the money in a typical £100,000 defined contribution pension comes from. Investment growth accounts for around two thirds of the total (65% / £65,000). Individual contributions make up £18,000, employer contributions add £13,000, and tax relief accounts for £4,000.
Despite these figures, many people overestimate the impact of their individual and employer contributions. A significant number, 39%, believe their individual contributions have the biggest influence on their pension’s final value. Similarly, 27% think employer contributions play the most significant role. Only 8% correctly identify tax relief as the least significant contributor, demonstrating a widespread misunderstanding of how pensions grow.
The Power of Time and Investment Growth
A pension’s value can fluctuate over time, and it may be worth less than the initial investment. However, time can be a key advantage for pension growth, particularly through compound investment growth. This effect, where returns generate their own returns over time, can significantly boost a pension pot.
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The research highlights a concerning trend among people delaying retirement planning. Only 15% actively prioritize pension saving, while 21% see it as a concern for later. This trend is even more pronounced among younger generations, with 35% of Gen Z placing retirement planning on the back burner.
Starting early can make a substantial difference to the size of a pension pot. Someone who starts working on a salary of £25,000 and pays minimum monthly auto-enrolment contributions (5% employee, 3% employer) from age 22 could build a total retirement fund of £210,000 by age 68, adjusted for inflation. Waiting just five years until age 27 to start contributing could result in a total pot of £170,000, £40,000 less, with the money having less time to realize compound investment growth.
Jenny Holt, Customer Savings & Investment Director at Standard Life, commented on this phenomenon. “Compound investment growth can be one of the most powerful forces in pension saving, but our research suggests many people underestimate the role it plays. Contributions are important, but the real benefit often comes from giving those contributions time to grow and generate returns over decades,” she said.
While balancing pension saving with immediate expenses, engaging early with pensions and maximizing employer contributions can help boost retirement savings over time. By understanding the role of investment growth and starting to save early, individuals can make the most of the power of time in their pension planning.
