The little-known pension superpower that is boosting your pot by £65k – and 3 steps YOU can do to make the most of it

YOUR pension has a secret superpower that is boosting your pot by £65k on average – but are you making the most of it? Pensions grow into big nest eggs because they are fuelled by something called “compound investing growth”. But only one in four savers know it’s powering their pot – here’s how to make sure that you are making the most of it. Your pension pot could be getting a huge boost from investment growth Credit: Alamy Compound investment growth is essentially a snowball effect – as your investments make returns, you’ll then see those returns grow over time too. This is what helps to turbocharge your pension pot. Sign up for the Money newsletter Thank you! For a typical defined contribution pension pot of £100,000, around £65,000 of the value comes from compound investment growth, according to numbers crunched by Standard Life. A defined contribution pension is a retirement savings plan where you build up a pot of money based on how much you and your employer pay in, plus any investment growth. You’ll likely have a defined contribution pension if you have a workplace pension. If you have a workplace pension, you’ll automatically start paying into it if you’re over 22 years old and earn over £10,000 a year. You’ll need to pay in a minimum of 4% of your earnings, while your employer will contribute 3% – and you’ll get another 1% in tax relief from the Government. Standard Life says that for the typical £100k pension, your individual individual contributions account for £18,000, employer contributions make up £13,000, and tax relief adds another £4,000. Most read in Money Get FREE pension advice and boost your pot by £1,000s *If you click on this link we will earn affiliate revenue Sticking with your current provider could cost you thousands of pounds in retirement. That’s why Pense is offering free pension advice for people with pots of all sizes – whether it’s a drawdown or annuity. Speak to one of their specialists to get a detailed breakdown of your options. Book your free consultation NOW Pense Ltd is authorised and regulated by the Financial Conduct Authority number 231629. Therefore, it’s actually the magic of compound interest that is powering your pot’s growth. But two-fifths (39%) of savers mistakenly believe individual contributions make the biggest difference. Marianna Hunt, personal finance specialist at Fidelity International, says: “The sooner your money is invested, the longer it has the opportunity to grow and benefit from compounding, where investment returns can themselves generate further returns over time. “Starting early also means you don’t necessarily need to begin with large amounts. Even relatively small, regular contributions have longer to build, while delaying can mean having to put away more later to achieve the same goal.” Here’s how to harness the power of compound interest to make your pot work harder for you. Step one: Start early and NEVER opt out The earlier you start, the more chance your pension pot has to grow over time Credit: PA The most important step is to NEVER opt out of your workplace pension scheme. Around 500,000 people a year opt out of their workplace pensions, according to Department for Work and Pensions figures. Worryingly, almost 10% of people aged under 30 are choosing to opt out. But delaying when you start paying into your pension can see you missing out on THOUSANDS in your later years. Someone who starts working on a salary of £25,000 and pays the minimum monthly contributions from the age of 22 could build a total retirement fund of £210,000 by the time they turn 68. This includes employer contributions and tax relief. But waiting just five years until age 27 to start contributing could result in a pot of £170,000 – which is £40,000 less. Jenny Holt, customer savings and investment director at Standard Life, says: “This is why starting early can make such a difference. “Even modest contributions made earlier in your working life have longer to benefit from potential compound investment growth, while delaying saving can mean missing out on the years when your money could have been working harder for you.” Just 15% of people surveyed by Standard Life said they were actively prioritising paying into their pension. Another one in five (21%) said they saw retirement planning as something to worry about later. Step 2 : Get your employer to funnel in more free cash You can essentially get free cash from your employer by getting them to match your payments Credit: PA:Press Association Some employers will increase their contributions to your pension pot if you increase the monthly amount you set aside too. It’s usually a direct match, so if you pay in an extra 1% then they will add an extra 1% too. Just be aware there is usually a maximum level they will match. Still, it’s essentially free money and the more you build up earlier in life, the more chance it has to grow. You could increase your pension contributions whenever you get a pay rise. Check first whether your employer will match any extra contributions and how much they’re willing to pay in. Step 3 – The ‘default’ trap to avoid Check what your pension is invested in and make sure it’s the right level of risk for you Credit: PA Make sure you’re taking on the level of investment risk that’s right for you. Some investments are riskier than others – for example, putting money into the stock market is riskier than putting it into government bonds. Bonds are when you lend money to a government in exchange for regular interest payments. If you won’t need the money for a long time, it’s worth taking more investment risk. That’s because the longer you stay invested, the more chance your money has to grow and you can also ride out any bumps in the market. You might want to be more cautious if you need the money sooner, such as in the next five to 10 years. You should check where your pension investments are going and consider if they’re the right level of risk for you. Sarah Coles, head of personal finance at AJ Bell, says: “If you haven’t made a decision about where to invest, you’re likely to be in the default fund, which tends to be middle-of-the-road so it’s a reasonable choice for the average person. “However, if you can get to grips with pension investments, you can tailor yours better to your needs. “For those earlier in their career and comfortable with more risk, this could mean more growth potential.” How I'm supercharging my pension pot By Emily Mee, Consumer Reporter I’M trying to turbo-boost my workplace pension pot currently by switching my pension plan to a riskier one. I used to save into a Scottish Widows standard plan, which is called the Balanced Targeting Flex Access, but it’s pretty middle-of-the-road when it comes to risk. As I’m 29 and still have a few more decades until I retire, I can afford to go for a more high risk, high reward plan because there is time to smooth out any bumps in the market. Now I’m invested in the Adventurous Targeting Flex Access fund, which has an annual return of 6.5-7% – compared with 5% for the balanced fund. If I put in £300 a month into my pension and retired in 37 years, I’d have netted an extra £140,000 by retirement by moving to the adventurous fund. Comment now