Savings accounts v pensions: Where should you prioritise putting your cash?
Should you put spare cash in a pension or a savings account? It truly depends on your circumstances. Learn three common savings dilemmas and how to handle them.
Spend enough time online, and you will begin to read conflicting advice about the “best way” to grow your wealth.
Pay off your mortgage – or don’t. Put all your money in your pension – or perhaps that’s a terrible idea. Invest every penny in the stock market – or stay far away from any kind of financial market because the risk is too high. The contradictions from “experts” are endless.
A common debate of this nature is the relative efficacy of savings accounts and pensions.
Work with a financial planner, though, and you will begin to understand that no article, LinkedIn post, or Facebook video can tell you the best place to put your available funds. Your stage of life, existing financial circumstances, and long-term goals form a unique puzzle that only you, and a qualified planner who knows your situation, can solve.
In the meantime, here are three potential dilemmas you could face and some tips for handling them.
If you’re still in the early stages of building wealth
The early decade or so of your career is all about building a strong financial foundation.
Pension contributions are a huge part of this. Starting to invest in your pension as early as possible – even in small amounts – could lead to significant compound growth over the decades that follow. Don’t underestimate what your contributions can add up to – Nest provides a helpful example if you want to learn more.
On the other hand, you won’t be able to access your pension until 55 (rising to 57 by 2028). Locking away too much money too soon could leave your short-term financial position unsteady. So, it’s worth building an emergency fund in cash – a pot you can access at any time – valued at approximately three to six months’ essential expenses. You could use this money to pay for home or car repairs, vet bills, or to cover a shortfall if you need to stop working.
The bottom line: making early pension contributions is crucial, but your emergency fund is essential too. Remember to shop around for competitive interest rates on your savings.
If you’re risk-averse
After building an emergency fund, you could still be attracted to the idea of keeping your money in cash so it’s more readily available.
You could also be concerned about stock market fluctuations that could cause your pension to lose value. Your pension is invested by the pension provider, but although many allow you to choose your risk level and the type of fund you invest in, you may feel nervous about taking any risk at all – leading you to favour your savings account over pension contributions.
While this is an understandable point of view, you need to remember that inflation is likely to erode the value of your cash over time, whereas market investments typically grow faster than the rate of inflation over the long term. Indeed, this is the hidden risk of cash – while your money is “safer” from forces outside of your control, like a stock market downturn, it may also lose purchasing power, leaving you worse off.
The bottom line: keeping all your money in cash for fear of taking on too much risk could lead you to take on the “hidden risk” of inflation. It’s worth talking to a financial planner if you are nervous about your pension contributions being invested.
If you’re hoping to retire at 55
For many, retiring as soon as possible is an all-important life goal.
If you want to start taking your pension at 55 (the minimum age is rising to 57 in 2028), it’s worth considering the benefits of contributing to your pension now.
- As you read earlier, your pension is invested in a wide range of assets for optimum performance. While there is always the risk of capital losses, regular pension contributions could compound and support significant growth between now and your retirement.
- Your contributions may receive tax relief from the government. Depending on your marginal rate of Income Tax, you could claim up to 45% tax relief on your contributions, further boosting the value of your pot.
- You can take 25% of your pension tax-free, up to a maximum of £268,275.
Although pensions are not tax-free saving or investment vehicles, there are usually greater opportunities for growth within a pension than within a cash account. Plus, early retirement is not cheap – you may need a significant sum to cover your expenses over the long term.
The bottom line: pensions are usually the favourable choice for those wanting a long and comfortable retirement, but they do carry some risks.
At Kellands, we’ll support your goals no matter what stage of life you’re in
The points above describe just three dilemmas you could face when building wealth for the future. There may be countless more, so having a trusted professional by your side throughout it all could prove invaluable.
Here at Kellands, our team provides expert advice on:
- Tax
- Estate planning
- Mortgages
- Investments
- Pensions
- Savings
- Intergenerational gifting
- Protecting your wealth from the unexpected.
When you work with us, you will receive:
- A bespoke financial plan
- Data-driven reassurance about your future
- Long-term support from a seasoned professional
- Peace of mind that your hard-earned wealth is in safe hands.
Email us at hale@kelland.co.uk, or call 0161 929 8838, to discover how we can help you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.