In a special edition of the savings guide, April Leeson, financial adviser at The Private Office, discusses whether earners should pay into pensions or savings accounts, alongside our usual top rates tables…
The balance between how much you deposit into a pension or cash savings depends heavily on what stage of life you are in, how much you can afford and what access you might need and when.
It’s advantageous for younger people to prioritise pensions for long-term growth because compound returns over decades mean they can afford to take more equity risk.
But savings should still be maintained as an emergency fund (with a pot worth three to six months of your expenses recommended).
Cash can also be vital for expenses like saving for a deposit on a home.
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For people in middle age, balance becomes key.
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It’s important to keep building pensions but also to increase savings to create a buffer against risk when you begin making withdrawals.
You would normally earn more as your career develops, so you should have more available to put into your pension, and you could benefit even more from tax relief.
Cash savings are essential for retirees for covering short-term living costs, enjoying their retirement years and future healthcare needs.
Pensions remain important for long-term income, but withdrawals must be managed carefully so that you don’t unwittingly pay too much tax.
For a look at the best up-to-date savings options, see below – or scroll down to find out more about the pros and cons of savings v pensions…
Advantages of pensions
Long-term growth: Investments within pensions can usually outperform cash savings over the long run, helping to keep pace with or to beat inflation.
Tax benefits: Pension contributions usually receive tax relief at the basic rate of income tax or your own marginal rate, boosting the amount invested.
So, for each £80 invested, you’ll receive £20 tax relief. If you’re a higher rate or additional rate taxpayer, you can claim back the extra from HMRC through self-assessment.
You can save on national insurance contributions by contributing to a pension via salary sacrifice, too.
If you were to die before age 75, a pension can provide longer-term income tax benefits for your beneficiaries.
Pension funds grow tax-free: All returns are free of income tax (until you withdraw), as well as capital gains tax and dividend tax.
Company contributions: Your employer will pay into your pension, too.
Retirement income: Pensions are designed specifically to provide an income in retirement, for you and your spouse (on death), through structured withdrawal strategies, with a quarter of the pension being entirely tax-free – as a tax-free cash lump sum – up to a maximum of £268,275.
Disadvantages of pensions
Access restrictions: You usually cannot access pension funds until a set age.
Market risks: Investment returns fluctuate. Timing withdrawals badly can erode value.
Complexity: Managing pension investments often requires careful planning and regular reviews, as legislation changes and allowances move around.
Advantages of savings
Liquidity: Cash savings are immediately accessible, useful for emergencies or short-term needs.
Short-term returns: Higher interest rates mean cash savings
have become more attractive.
Personal Savings Allowance: For basic-rate taxpayers, up to £1,000 of interest can be earned tax-free per year. It’s £500 for higher-rate taxpayers.
Disadvantages of savings
Inflation risk: Over time, cash can lose value in real terms.
Taxable interest: Interest on large savings can push earners into a higher tax bracket without realising.
Lower returns: Savings accounts do not grow wealth like
investments or pensions do.
According to JP Morgan Asset Management, cash has been the worst-performing asset class against inflation since 1900.
