The Power of Compound Returns

What if I told you that you could triple, or even quadruple, your savings? Well, you can with a pension pot.

Your pension will probably be the biggest investment you ever make. Potentially even more than your mortgage. They’re important – and powerful.

What’s the source of their power? Compound returns.

What Are Compound Returns?

Compound returns are the earnings you receive when you reinvest the investment growth of your original savings into your pension pot. Compound returns can significantly increase the value of your original investment because your pot is constantly generating additional savings – which are, in turn, benefitting from investment growth.

Here’s an example:

If you save £100 in a pension pot, and over the course of a year that £100 gains 5% in investment growth – you have £105. Wahoo!

The following year, your pension grows another 5%. But this doesn’t just apply to your original £100, it applies to the whole pot – meaning you gain 5% on £105. So you finish year two with £110.

Of course, as with all investments, your capital is at risk so pensions can go down in value as well as up and you could get back less than you invest. The 5% assumed investment growth is illustrative and not guaranteed.

These compound returns don't seem a lot. But if you apply this idea to the magic ingredient – time – it really adds up. Even if you never added anything to this pot again, in 25 years time it’d almost quadruple to £383, without you doing anything at all.

They say there’s no such thing as a free lunch. Well, that’s not true, compound returns mean a lot of free lunch.

Do Regular Contribution Make a Difference?

You’ve seen the power of compound returns. Now let’s see what happens when you add even more to your pension pot. Here are two scenarios:

Jack is 30. He makes a £50 contribution to his pension pot every month and earns 5% investment growth each year.

When Jack comes to retire at age 60, he’ll have been contributing to his pension for 30 years. That’s a total of £18,000 in contributions. When he comes to take the money out, his pension pot value will have increased to £41,000. More than double!

Jill’s a bit younger than Jack. They started saving at 18 and put £50 into their pension until they turned 30 – again, earning 5% investment growth each year.

When they retire at 60, they will have made contributions for 12 years – a total of £7,200. But with the power of compound returns will accumulate a pension pot value of £44,000. Almost six times as much!

What If I Can’t Save Consistently?

Topping up your pension regularly is best and sporadically is good, but the most important thing is to have the pot.

Even if you can’t save regularly like Jack and Jill, leaving your savings pot without contributing still takes advantage of compound returns.

Make Saving Easier with Flexible Pension Contributions

At Penfold, we’ve made it easy to top up your pension with regular contributions, make a one-off payment when you have money to put away savings, and lower or stop your regular payment when you don’t.

It makes saving for retirement a lot easier. And on top of compound returns, you also get some free money from the government in the form of tax relief.

Often, starting is the most difficult step. But it pays to get ahead – and only takes five minutes to get set up.

Start saving with Penfold