Start a pension or open a savings account?

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Whether you’re one of the 17% of Brits not saving enough for retirement or amongst the fifth of those who believe they won’t be able to afford to retire, it’s increasingly important to plan for your future as early as possible. Are you starting to save for retirement and considering starting a pension or opening a savings account? On this page, you’ll learn the benefits of both, so you can decide which option best suits you.

Do I need a pension or savings account?

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

If you’re deciding between saving for a pension or opening a savings account, there are different things you need to consider. If you’d like the freedom to be able to do the things you enjoy once you retire as well as keep on enjoying yourself now, you might want to consider both.

If you choose to save for both, 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. Things like holidays and a new home can feel much more pressing, but your money will grow more if you can save over a longer period of time.

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When should I start saving for retirement?

The simple answer is that regardless of whether you pay into a pension or open a savings account, saving for retirement as early as possible is generally the best thing to do. The more you can put away while you’re working, the more comfortable you will be when you retire.

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What are the benefits of opening a savings account?

Savings accounts allow you to earn interest on your deposits. The benefits of opening savings accounts include the following:

  • The flexibility to access your money
  • Competitive interest rates, with higher interest rates on long-term savings accounts
  • Quick and easy set-up and management
  • Earn £1,000 in interest tax-free per year if you’re a basic rate taxpayer
  • Higher rate taxpayers can earn £500 in interest tax-free per year

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

Different types of savings accounts, such as notice accounts and fixed rate bonds, offer effective ways of growing your savings. Both are lump sum savings accounts that offer competitive interest rates. Notice accounts give you the flexibility to withdraw money from your savings on a set notice period, while fixed rate bonds are a good option if you can lock your money away for a set time. The fixed interest rate means you’ll know exactly how much interest you’ll earn. 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.

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What are the benefits of starting a pension?

The obvious benefit of a pension is that they’re tailor-made for the purpose of retiring. Most people can contribute to their pension before their pay even reaches their pocket through their employer, making pensions an easy way to automate your retirement savings.

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 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 taxpayer, you can save 45p in tax for every £1 you pay into your pension.

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.

Pensions aren’t as flexible as savings accounts as you can’t make a withdrawal until you’re 55. However, when you can make withdrawals, you are eligible to take out as much as you need from your pension at any time. You can withdraw up to 25% of your pension as a lump sum tax-free, 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 great way to prepare for your retirement and ensure you’ll have enough money to continue enjoying your life and participating in your hobbies. 

However, if you’re still fairly young, you might be wondering whether it’s best to start a pension or open 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 
  • Depending on the sort of pension you invest in, there is a possibility you’ll get a low or even no returns, for example if your money is invested in poorly performing stocks or shares 
  • Pensions are sometimes complicated to understand

Pension and savings accounts compared

If you’re unsure whether it’s best to open a pension or a savings account, you might want to spend a little amount of time comparing the two.

Pensions Savings
Access You’ll be unable to access your cash until you reach a certain age (this will be 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 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 a huge potential for growth but also for risk. 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.

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

When saving for retirement, you’re likely committed to saving long term, which is great for accruing interest. If you’re able to go without access to your money, you could also opt for a more restrictive savings account, such as 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 saving 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, register for a Raisin UK Account and apply for free online today.

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