Steven Cameron, Pensions Director at Aegon 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. Compound interest is often said to be one of the wonders of the modern world, but even 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% 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% which would take over 37 years to grow to £125.
“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% 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.
“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 triple 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.”
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