Pension: Britons urged to choose pensions over savings due to poor interest rates

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Pension saving can be a fantastic way for Britons to save towards their retirement and any goals they may have. However, it may be the case that some will prefer to put money away in savings accounts, for their access whenever they need it. Pensions, while having some freedoms implemented in the last few years, are only accessible without penalties after the age of 55 – and so some will turn towards general bank accounts.

But it is worth considering whether this could be a suitable option, particularly with interest rates stumbling in the current climate.

Research undertaken by Aegon has shown a £100 cash deposit into an average easy access savings account would grow at a snail’s pace.

The company has suggested the deposit would take approximately 100 years to grow to £125, taking current interest rates into account.

Interest rates have been affected by the Bank of England’s decision to lower its base rate to 0.1 percent back in March, causing other providers to follow.

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For those hoping to grow their money, then, the research is likely to be displeasing.

However, there are certain steps worth taking when it comes to planning ahead. 

Steven Cameron, Pensions Director at Aegon, commented on the matter.

He said: “With interest rates on cash deposits so low, now might be a good time to review what you hold in cash and what you invest in your pension.

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“Compound interest is often said to be one of the wonders of the modern world, but even so, it will struggle just now to boost the returns on the average cash savings account with rates so low.

“The average easy access savings account currently pays just 0.23 percent interest.

“If this level persists, people face a lifetime’s wait before seeing a noticeable return on their money, and in fact it would take around 100 years before it grows to £125.

“Even if you leave your money in a best-buy account, the rate is likely to be no higher than 0.6 percent, which would take over 37 years to grow to £125.”

A practical solution, then, is likely to be found by investing in a pension for later life.

Mr Cameron continued: “Pensions however, benefit from government tax relief and £100 saved into a pension immediately becomes £125 if you’re a basic rate taxpayer.

“By investing your money in the stock market, you also increase your chances that it will grow further over time.

“If you achieved a return of 4.25 percent a year on your initial £125, it would be worth £354 in 25 years’ time.

“Furthermore, if you’re lucky enough to work for an employer who’ll match your pension contributions, the benefits of pensions are even better as the £125 personal contribution including tax relief will be boosted by an additional £125 from your employer.”

However, while saving for the future has arguably never been so important, making sure individuals are financially secure in the present is also key.

With the advanced financial pressures created by COVID-19, having enough money at ones disposal remains vital.

Mr Cameron concluded: “It’s good financial practice to have cash savings equivalent to three months of your expenses on hand and many people feel more comfortable having six or more months available.

“However, it is worth thinking about what the right level of cash savings is and the returns you might be sacrificing by leaving money in an account with low interest rates.

“Workplace pensions have the tripe benefit of a government top up, an employer contribution and the potential to grow in the stock market over time, so are well worth considering as part of the decision.”

For those investing money into a pension, however, it is also vital to understand how this works.

The value of an investment can go down as well as up, and so returns are not always guaranteed. 

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