Pensions are boring, until you understand tax relief and compounding growth

The following is an illustrated example only.

This report shows how pension tax relief could enhance long-term investment growth through compounding. It compares the basic-rate (20%) tax relief on £200 monthly contributions at 5% annual growth.

Basic-Rate Tax Relief (20%) Scenario       

Timeframe	Your Cost (£)	Gov. Tax Relief (£)	Total Invested (£)	Final Value (£)	Total Government Tax Relief plus Growth	% Return on Gov. Money
10 years	24,000	6,000	30,000	38,821	7,765	=29%
20 years	48,000	12,000	60,000	102,758	20552	=71%

Interpretation:

• For basic-rate taxpayers, the 20% tax relief could turn £200 per month into £250 invested each month.
• At 5% annual growth, this top-up could produce £7,765 of extra value after 10 years and £20,552 after 20 years
• For higher-rate taxpayers (40%), the uplift could clearly be far greater

Conclusion:

• Whatever rate of Pension tax relief applies in the future, it remains one of the most tax-efficient investment advantages available in the UK.
• Your money can grow through government ‘free money’ top-ups and long-term compounding of this money.
• A pension remains one of the most efficient ways for an individual to reach an end point, at which time they can live off their capital accumulated and continue to live their life once their salary stops…. RETIREMENT
• With good planning and taking advantage of such efficiencies, suddenly maybe a pension isn’t quite so boring!!

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested. Transferring out of a final salary pension is unlikely to be in the best interest of most people.