retirement

If your goal is financial independence, your pension could be one of the most powerful tools you have.

But it doesn't just grow because money goes into it. How your pension grows depends on a few things.

Money paid in, its charges, how it's invested, and how long it stays invested.

I'm Donato Boccardi, Head of Investments at Aviva. Every day, I help people invest for the future and I've seen just how powerful pensions can be.

In this episode of The Pensions Playbook, we will explore why your pension can be one of your most overlooked investments and help you see it in a new light by looking at how contributions, investing and compound growth work together.

Just a quick note before we begin. Tax rules and pension legislation can change and depend on your individual circumstances. This video is intended to provide general educational information and shouldn't be taken as financial advice or a recommendation to invest.

Let's go!

So, how do pension contributions work?

It's easy to not think about it further than noting the amount that's deducted on your payslip each month or leaving your bank account. But that's only part of the story.

There are actually lots of different ways you can build your pension over time. Here's how pension contributions work.

If you have a workplace pension, your contributions are normally deducted from your pay through payroll.

Some employers also offer salary sacrifice, where you give up part of your salary and your employer pays that amount into your pension instead.

This can reduce the income tax and national insurance you pay, depending on your circumstances.

With a Personal Pension or a SIPP, you can usually set up regular payments by Direct Debit.

You can also make one-off payments into both workplace and personal pensions, perhaps after a bonus or inheritance.

Just remember, there are HMRC limits on how much you can pay in.

Workplace pensions receive employer contributions.

And did you know, you might be able to set up employer contributions into your SIPP or Personal Pension as well?

That's important, because it means you are not building your pension entirely on your own.

Just remember, the value of a pension can go down as well as up, and you could get back less than invested.

If you're eligible for automatic enrolment, your employer is required to contribute a minimum amount of 3% into your workplace pension and many employers choose to pay in even more.

If you are paying into a workplace pension or a personal pension, both will usually receive contributions from you, as well as tax relief from the government.

For example, if you are a basic-rate taxpayer, saving £100 into your pension only costs you £80 from your take-home pay.

Over the course of a year, that will add up to an extra £240 into your pension from tax relief alone.

And that's before taking any employer contributions into account.

Of course, tax benefits depend on your individual circumstances and may change over time.

It’s important to be aware that the Government sets limits on the amount of tax relief that you can receive.

If you'd like to see the impact different contribution levels could have over time, online pension calculators are a helpful place to start.

It's not always about paying in new money.

You may be able to transfer pensions from old jobs or combine pensions.

Before transferring, compare things like charges and investment options, and check whether you could lose any valuable benefits.

This can help you decide whether a transfer is right for you.

Every contribution, big or small, is another step towards building your retirement savings.

And checking in on your pension along the way can help you stay on track for the future you want.

So, how does your pension grow after you invest?

The money in your pension is typically invested with the aim of helping it grow over time.

That growth matters, because for many people the state pension won't be enough on its own to fund the retirement they're hoping for.

Workplace and personal pensions help bridge that gap, turning some of the money you earn today into income for the future.

The earlier you start contributing, the more opportunity your pension has to grow.

That's where one of your biggest advantages comes in. Time.

You will probably have heard it before, but might still wonder why time matters so much.

When your investment grows, those returns stay invested too.

Imagine you've just started a new job, and £100 a month is being invested into your pension.

Let's say, just as an example, that your investments grow by an average of 5% a year.

Over 30 years, £36,000 would have been paid in, but based on the 5% annual growth, your pension could be worth around £83,000.

That means that around roughly £47,000 of the final amount would be investment growth, and that's helped by the power of compounding.

Think of it like a snowball rolling downhill.

As it gets bigger, it can gather more snow along the way.

Of course, investment growth isn’t guaranteed, as the value of your pension can go down as well as up, and you could get back less than invested. Charges will also affect how much you get back.

Now you know how your pension grows. Let's look at some of the ways you can help it grow even more.

It's easy to let your pension run on autopilot.

For lots of people, that's exactly what happens.

Your pension gets set up, contributions go in each month, life gets busy, and before you know it, years have gone by.

While you can't control how markets perform, there are a few simple things you can do to give your pension the best opportunity to grow over time.

First, if you receive a pay rise, consider increasing your pension contribution by just 1%.

You may hardly notice the difference in your take-home pay, but over time, even a small increase can make a meaningful difference to your retirement savings.

Second, if you've started a new job, or even if you've been with the same employer for years, check whether they'll match additional pension contributions.

Some employers are willing to contribute more if you increase your own contribution, meaning extra money goes into your pension without you having to fund it all by yourself.

Third, try to avoid stopping contributions unless you really need to.

Life doesn't always go to plan.

There may be times where reducing or pausing your pension contributions feels like the right decision, but if you can keep contributing even small amounts, your pension has more opportunity to benefit from future investment growth.

Of course, investments can rise as well as fall in value, and you could get back less than what you invested.

Finally, keep track of your pensions.

If you had £10,000 sitting in a savings account, you'd probably know exactly where it was.

Your pension deserves exactly the same attention.

If you've changed jobs over the years, it's worth checking you haven't left a workplace pension behind.

The right approach depends on the retirement you're working towards.

As your life and finances change, these simple actions can help make sure your pension is still working towards your goals.

So, as you can see, lots of smaller decisions, made consistently over time can help your pensions grow.

Think of it like going to the gym.

You won't see immediate results.

Over time, even small efforts make a big difference.

Regular contributions, employer contributions, investment growth, tax relief, and giving your money time to grow all work together to help build your retirement savings.

Before the next episode, log into your pension account and ask yourself three simple questions.

How much are you contributing into your pension?

How much does your employer pay into it?

Could you use Aviva's Pensions Calculator to see what difference increasing your contributions will make?

Those three answers will give you a much clearer picture of whether you're on track for the retirement you want.

Next time, we'll take a closer look at tax relief - why it's one of the biggest advantages pensions have over many other ways of saving, and how to make sure you're making the most of it.

This video is intended to provide general educational information and shouldn’t be taken as financial advice or a recommendation to invest. The value of investments can go down as well as up, so you could get back less that you invest. Tax rules and pension legislation can change and depend on your individual circumstances. If you’re unsure what’s right for you, we’d recommend seeking guidance or regulated financial advice. There may be a charge for advice.

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