Should I start a pension or open a savings account?

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If you’re one of the 35% of Brits not on track for a minimum lifestyle in retirement*, it’s particularly important to plan for your future as early as possible. Are you starting to save for retirement and considering whether to start a pension or open a savings account? Perhaps you already have a savings account, and you’re wondering, “Is it worth having a pension?” On this page, you’ll learn the benefits of both, so you can decide which option best suits you.

The rundown
  • Retirement planning: Whether you choose a pension or savings account will depend on your individual preferences, goals, and financial circumstances
  • Tax considerations: Consider the tax implications of a pension vs savings account, as pensions come with tax relief on contributions, while savings accounts may offer tax-free interest up to certain thresholds
  • Savings or pension: You might want to consider combining a pension and savings account to ensure a varied approach to your retirement savings plan, as this can maximise your benefits

Do I need a pension or savings account?

Deciding whether you need a pension or savings account (or both) comes down to your individual priorities and circumstances.

If you’re torn between saving for a pension or opening a savings account, there are a few factors to consider. If you’d like the freedom to continue doing the things you enjoy both now and during retirement, you might want to consider both options.

It’s important to bear in mind that the earlier you begin to save for retirement, the better – and if you want to retire early, you’ll need more in your retirement pot to live on. While it can be tempting to prioritise things like holidays or a new home, your money will grow more if you can save over a longer period of time.

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When should I start a pension or open a savings account?

The simple answer is that regardless of whether you pay into a pension or savings account, saving for retirement as early as possible is widely considered a sensible approach. The more you can put away while you’re working, the more comfortable you will be when you retire. Also, remember that some pensions and savings accounts offer the advantage of compound interest. This means that even if you can only make small contributions early, this will generally have a greater impact on your retirement pot than larger lump sum contributions made later on.

Source: https://www.retirementlivingstandards.org.uk

What are the benefits of opening a savings account?

Savings accounts allow you to earn interest on your deposits. Opening a savings account offers several benefits:

  • Flexibility: Savings accounts provide you with the flexibility to access your money.
  • Competitive rates: Long-term savings accounts offer the benefit of higher interest rates.
  • Setup and management: Savings accounts are generally quick and easy to set up and manage.
  • Tax-free interest: With the personal savings allowance, if you’re a basic rate taxpayer, you can earn £1,000 in interest tax-free per year. Higher rate taxpayers benefit from up to £500 interest tax-free.
  • Variety of options: There are many types of savings accounts to choose from, so you can find one that suits your needs:
    Notice accounts: These allow you to withdraw money by giving advance notice. This way, you can earn competitive interest rates while having access to your funds when needed.
    Fixed rate bonds: Lock away your money for a set time and get a competitive interest rate in return. This type of account is popular with savers who want to know exactly how much interest they’ll earn.
    Individual Savings Accounts (ISAs): ISAs offer tax-free savings up to a certain limit each year. With various types including cash ISAs and stocks and shares ISAs, they provide a tax-efficient way to grow your money over the long term.

With many different savings accounts available, it’s important to shop around for the best interest rates and the right type of savings account for you.

Notice accounts and fixed rate bonds are both lump sum savings accounts with competitive interest rates. Notice accounts give you the flexibility to withdraw money from your savings after a set notice period, while fixed rate bonds are a good option if you can leave your money untouched for a set time. Fixed rate bonds might be right for you if you have a lump sum of money that you want to grow without having to worry about interest rate changes or stocks and share price volatility.

Are there any cons of opening a savings account vs. starting a pension?

By opening a savings account, you’ll be keeping your money safe and earning interest on your deposits.

However, if you choose to open a savings account instead of opening a pension, you may not enjoy the same tax benefits that come with saving for your pension, as well as any other employer or government-backed schemes that might be available to you.

While savings accounts don’t offer tax relief, it’s worth noting that some account types still offer tax benefits. With a stocks and shares ISA, for example, you pay no income tax or capital gains tax on your investment returns. Also, when it comes to tax on savings accounts, many savers benefit from the personal savings allowance.

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What are the benefits of starting a pension?

If you’ve always relied on a savings account to grow your money, you might be wondering, “Are pensions worth it?” Here are some of the key advantages of pension schemes:

  • Tailored for retirement: The obvious benefit of a pension is that they’re tailor-made for the purpose of retiring, providing a structured way to prepare for your future.
  • Automated savings: Contributions to your pension can be deducted directly from your pay cheque by your employer, making pensions an easy way to automate your retirement savings.
  • Tax relief: Another benefit of starting a pension is the tax relief you’re eligible for on contributions you make. If you’re a basic rate taxpayer, you can save up to 20p in income tax for every £1 you contribute to your pension, rising to 40p for every £1 you contribute if you’re a higher rate taxpayer. If you’re an additional rate taxpayer, you can save 45p in tax for every £1 you pay into your pension.
  • Automatic enrolment: If you’re eligible, you’ll automatically enrol in a workplace pension scheme (unless you actively decide to decline), which gives everyone the opportunity to start saving into a pension.
  • Withdrawal flexibility: Pensions aren’t as flexible as savings accounts as you can’t make a withdrawal until you’re 55, and this will rise to 57 in 2028. Once eligible, you can take out as much as you need from your pension at any time. However, it’s important to consider the implications of tax on pension savings. You can withdraw up to 25% of your pension as a tax-free lump sum, and any withdrawals you make after that are taxed at your personal rate.

Are there any cons of starting a pension vs. opening a savings account?

Starting a pension is a practical step towards preparing for your retirement and ensuring you’ll have enough money to continue enjoying your lifestyle and hobbies in the future.

However, if you’re still fairly young, you might be wondering whether it’s best to open a pension or a savings account. Some of the cons of choosing a pension over a savings account are:

  • With a pension, your money is locked in, making it inaccessible
  • You will likely be penalised for accessing your money early, such as forfeiting your interest
  • Pensions offer tax relief on contributions and tax-free growth, but withdrawals are usually taxed as income
  • Depending on the sort of pension you invest in, there is a risk of low or even no returns, for example if your money is invested in poorly performing stocks or shares
  • Pensions are sometimes complicated to understand
  • With pensions, the reduction in disposable income may affect how you budget and manage your finances

Pension vs savings accounts

If you’re unsure whether it’s best to open a pension or a savings account, you might want to take some time comparing the two options.

Pensions Savings
Access You’ll be unable to access your cash until you reach a certain age (this will rise to age 57 in 2028). Instant access savings accounts will let you access your cash whenever and wherever you need to.
Tax implications While tax might be payable when accessing your cash on retirement, it grows tax-free and there is often relief payable on contributions. No tax relief, and tax earned on interest is subject to your personal savings allowance
Usage Designed and structured specifically for retirement savings. Ideal for short-term savings goals such as a wedding, holiday or emergency fund.
Interest/growth Depends on the type of retirement pot you have. If your money is being invested in the stock market, there is huge potential for growth, but there’s also a risk of market volatility and potential loss of investment. Low interest rates mean growth is limited, but still possible.
Protection Pension protection depends on the type of scheme you’re in. All savings accounts held with a UK-recognised bank offer deposit protection of up to £85,000 per person, per financial institution.

Ultimately, your choice between a pension or savings account will depend on your personal circumstances, risk tolerance, and retirement savings plan. It can help to consider your individual tax situation, long-term financial goals, and retirement objectives when deciding between savings and a pension. While pensions offer upfront tax relief and tax-free growth, savings accounts provide more flexibility in terms of accessing your funds and may offer tax efficiency, particularly if you’re in the lower income tax brackets.

What are the best savings accounts to consider when saving for retirement?

When saving for retirement, committing to long-term saving can be beneficial for accruing interest. If you’re able to go without access to your money, you could consider options like a notice account or fixed rate bonds, which often offer higher rates of interest due to the restrictions placed on accessing your cash.

Should I open a pension or a savings account?

How you save for retirement depends on your circumstances. You don’t have to choose between a pension or a savings account; you can grow your money through both and enjoy the benefits that each has to offer. Keep in mind that it’s not a matter of a pension vs savings accounts, it’s about how best to ensure that you have enough to retire comfortably.

If you want to quickly and easily open savings accounts from a range of banks and building societies, register for a Raisin UK Account and apply for free online today.

*https://adviser.scottishwidows.co.uk/assets/literature/docs/61014.pdf

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