Where does my money go?
Your pension money leaves your pay and quickly finds its way into carefully chosen companies, property, bonds and cash.
It’s invested, in other words, which makes you an investor.
Our video explains what happens to your pension money after it comes out of your pay packet.
So where do your pension savings go?
Video Transcript
Have you ever wondered what happens to your pension money when it leaves your pay packet?
It doesn’t just sit quietly in a pot somewhere.
It’s used to buy bits of companies, buildings and bonds.
Over time if these grow and do well, your pension does too.
So when you start taking your pension
... you’ll hopefully end up with enough money...
... to pay for the lifestyle you want.
But there’s another part of your pension’s life that you might not know about.
When Royal London invests your pension money in a company,
... you and other Royal London customers own a share in that company...
That means that we can influence how those companies are run on your behalf.
We can encourage them to operate in a fair and responsible way...
... and to look after their employees,
... their communities, and the environment.
So, your pension money doesn’t just work and grow for you.
It also gives you power to help change the world for the better. Who knew?
Why is my pension invested?
Investing gives your money a fighting chance to grow in value over time.
If your money was only held in cash savings, inflation could eat away at its value, over time.
Investing gives your pension money the chance to at least keep pace with inflation, hopefully with some extra growth on top.
Investing comes with a risk of loss, too, which is greater than the risk of losing money held in a savings account. But the hope is that despite fluctuations in value, the overall growth trend for your pension pot will be higher than the relatively low interest that savings accrue – especially because of the value-eating effects of inflation.
So how is your pension different to savings?
Video Transcript
Do you know what makes your pension different to a savings account?
A pension is like a savings account you can’t touch for decades, right? Not quite. Pensions and savings are worlds apart.
For starters, when you pay money into your workplace pension, your employer tops it up too. And the Government pays in as well… yes, that’s free money!
All designed to reward you for doing the right thing by setting money aside for your future.
Unlike a savings account, where your money sits around doing not very much, your pension cash is invested.
And because you can’t use this money until you are at least 55, it has plenty of time to grow.
So, you may feel you can take more risk with your pension and invest in things that could give you a higher return than a savings account… like company shares.
This is important, because if your money stays in savings, the chances are it won’t grow as much as it could in your pension.
It could even lose value if inflation is higher than interest rates. Let us explain what we mean by that…
Inflation is a general rise in prices over time, which can be bad news for your savings because as prices rise, the things you buy cost more. If this happens more quickly than the rate of growth of your savings, you won’t be able to buy as much.
Whereas investing in a pension gives your savings the chance to at least keep up with inflation, with the possibility of some extra growth on top.
That way, when you’re ready to stop working, your pension could have the power to pay for the lifestyle you want… what’s not to like?
Remember, investments can go down as well as up and you might not get back all the money you paid in.
How is your pension different to a savings account?
Based on relief at source*
Imagine your salary was the UK Median (£31,285). 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: £130.35
Your employers pension contribution: Savings £0.00, Pension £78.21
Savings (matching equivalent pension contribution): Savings £130.35, Pension £0.00
Total put away (monthly): Savings £130.35, Pension £208.56
Actual monthly cost to you: Savings £130.35, Pension 104.28
Take-home pay (after savings and pension contributions): Savings £1,947.64, Pension £1,973.71 (after net pension contributions, tax and National Insurance deductions)
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 £46,927.50, Pension £75,084
Total after 30 years: Savings £64,000 (based on savings account growth rate of 1%), Pension £93,000 (based on investment growth of 4.6%)
We have assumed a fund management charge of 1% and an inflation rate of 2%. Please note these figures are for illustrative purposes only and are not guaranteed.
*Relief at source means your contributions are taken from your net pay (after your wages are taxed). Then your pension provider automatically claims tax relief for you from HM Revenue & Customs (HMRC), adding the basic tax rate of 20% (different rules apply for Scotland) to your pension contributions.
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
• Risk of poor returns
To find out more about where your pension money goes, visit us at royallondon.com/secretlifeofpensions or #SecretLifeOfPensions. Find out what happens when your pension money leaves your pay packet
If you invest little and often for many years, you could build a surprisingly big pot.
It’s a win for society if people have saved enough for their own retirements, too.
How much should I be paying into my pension?
Based on relief at source*
You might have to say goodbye to your weekly take away coffees, but look at how much more you might end up with after investing this money into your pension instead. In this example we're assuming a contribution of 8% which includes 3% from your employer and 5% from you. We'll then look at the difference 1% increments make to the overall value.
Based on Median salary of £31,285 (ONS 2021)
Your pension contribution: Investing 8% of your salary - £130.35 (this is your contribution of 5%), Investing 9% of your salary - £156.43 (this is your contribution of 6%), Investing 10% of your salary – £182.50 (this is your contribution of 7%)
Your employer’s pension contribution (3% fixed): Investing 8% of your salary - £78.21, Investing 9% of your salary – £78.21, Investing 10% of your salary - £78.21
Total put away (monthly): Investing 8% of your salary - £208.57, Investing 9% of your salary – £234.64, Investing 10% of your salary - £260.71
Actual monthly cost to you: Investing 8% of your salary - £104.28, Investing 9% of your salary - £125.14, Investing 10% of your salary - £146.00
Take-Home Pay (after savings and pension contributions): Investing 8% of your salary – £1,973.71, cutting out 9 takeaway coffees (£20.86), Investing 9% of your salary - £1,952.86, cutting out 17 takeaway coffees (£41.71), Investing 10% of your salary - £1,932
Total contributions over 30 years: Investing 8% of your salary - £75,084, Investing 9% of your salary - £84,469.50, Investing 10% of your salary - £93,855
Total after 30 years (based on an investment growth of 4.6% and a fund management charge of 1%. These figures take into account 2% inflation and are shown in today's money): Investing 8% of your salary - £93,600, Investing 9% of your salary - £105,000, Investing 10% of your salary - £117,000.
Remember, investments can go down as well as up and you might not get back all the money you put in. Tax treatment depends on circumstances and could change.
To find out more about where your pension money goes, visit us at royallondon.com/secretlifeofpensions or #SecretLifeOfPensions. Find out what happens when your pension money leaves your pay packet
*Relief at source means your contributions are taken from your net pay (after your wages are taxed). Then your pension provider automatically claims tax relief for you from HM Revenue & Customs (HMRC), adding the basic tax rate of 20% to your pension contributions.