Many of us don’t give a lot of thought to the amount we contribute towards our pension and how much of a difference a small increase can make to our retirement savings when we finally need it. An increase of just 1% may seem so small to be considered insignificant, but is this really the case? How much could our retirement savings actually benefit from this additional 1%?
Let’s have a look at some examples.
The reason why a relatively small increase in pension contributions can give such a significant boost to your pension savings is the power of compounding. Compounding happens when earnings on your savings generate their own earnings. For example, during your first year of contributions in a pension plan, you will earn return on everything you saved, but in your second year you will generate return from both your total contributions and the earnings you made in the first year. This continues until retirement, meaning that the earlier you invest your money, the more benefit you will get from compounding. Adding more money to your pension pot by increasing your contributions just makes the compounding effect larger.
An additional 1% of contributions today may indeed be insignificant for most people, and that’s exactly why it is worth doing it. While you may not even notice the drop in your disposable income today, your pension savings can benefit significantly over the long run.
It is also worth considering whether you might receive a tax benefit on any additional contributions you make. If you are not already fully utilising your personal tax allowance, your income will reduce by less than the extra amount you contribute towards your pension. You can find out how much additional money you could be setting aside every year for pension contributions in order to maximise your tax allowance with our Income Tax Calculator.
So, if you can afford to put an extra 1% of your salary into your pension, consider doing it today, as the benefit is bigger when you start early. Our Retirement Income Calculator can help you find out how an increase in your contributions may affect the income you will have during retirement.
If you wish to increase your contribution into the Ancoria Pension Plan, contact us today to guide you on how to do it.