The £124,000 cost of not upping investment contributions

As the new tax begins, it’s a good time to think about spring cleaning your investments and consider increasing your contributions, especially if you’ve had a pay rise this year.

New data from interactive investor shows that upping your investment or pension contributions with inflation could boost your wealth by up to £124,000 over 40 years, compared to not increasing your contributions over the same period.

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According to Office for National Statistics (ONS) data, the average wage rose by 5.6% this year, meaning the average full-time UK worker on around £35,000 enjoyed a healthy pay rise of nearly £2,000, although of course many received a lot less. Alongside rising wages, there is finally light at the end of the tunnel as inflation fell to 3.4% in February, with signs that the cost-of-living crisis is finally easing. 

With many Britons receiving a pay rise ahead of the new tax year, calculations show the huge impact of upping your investment contributions with inflation, over a long time period, compared to keeping your contributions at the same level.

• A pension saver contributing £250 each month (£200 contribution plus £50 tax relief) could end up with around £124,000 more pension wealthby retirement due to upping their contributions by 2% each year - £496,000 compared with £372,000 
• Likewise, an investor making regular monthly contributions of £200 outside a pension could end up with around almost £100,000 more after 40 years if they increase their contributions by 2% - assuming annual pay rise is in line with the target inflation level - each year, compared to not increasing their contributions - £397,000 compared with £298,000

Assumptions: 5% annual investment growth net of fees, £200 monthly contribution plus pension tax relief at 20%, taking starting monthly contribution to £250, excludes the impact of employer pension contributions and assumes the pension saver has spare pension allowance.

Assumptions: 5% annual investment growth net of fees, £200 monthly regular investment.

Source: interactive investor.

Alice Guy, Head of Pensions and Savings, interactive investor says: “With many Britons enjoying pay rises this year, the new tax year is a great time to think about upping your regular investments or pension contributions. You can give your future self a massive pay rise by keeping an eye on your regular investments and inching them upwards over time. In contrast, the cost of not increasing your contributions can have a big impact on your future wealth, meaning you contribute less and less in real terms as time goes by.

“When it comes to your pension, increasing your contributions is especially valuable as any extra payments are supercharged by additional pension tax relief. This means it only costs £80 to increase your pension contributions by £100 each month, as you’ll receive a £20 tax boost. For higher-rate taxpayers it’s an even better deal and it only costs £60 to pay £100 into your pension, due to additional tax relief. Upping your pension contributions over time can give your wealth a huge boost and make it easier to achieve your retirement goals.

“Many people with workplace pensions will see their contributions increase automatically if they get a pay rise as their contributions are based on a percentage of their salary. But that’s not the case for self-employed workers or those who are saving extra pension contributions into another pension like a SIPP. And even if you have a workplace pension, it’s worth thinking about upping your contributions if you can afford it as the minimum contributions often aren’t enough for a comfortable retirement.

“Of course, life isn’t straightforward, and it isn’t always possible to up your pension contributions every single year. You might have periods where your costs increase, or you reduce your hours to bring up children or care for loved ones. Keeping an eye on your investments, checking your fees and contributing what you can afford are all important during those periods as even small contributions mount up over time and can make a big difference to your wealth and standard of living in retirement.”

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Various life events means that not everyone who receives a pay rise will be able to afford to uprate their investment contributions. But those who can could turbocharge their investment portfolio in a meaningful way over the long term.

“Uprating investment contributions by the same percentage as a pay rise allows investors to maintain their current standard of living while also boosting their portfolio. This approach also helps to avoid unnecessary lifestyle inflation, where expenses increase along with income, and instead ensures that you are consistently investing more for the future.

“Of course, it remains important to ensure you have enough savings to cover unexpected expenses and consider short- and long-term financial goals before increasing investment contributions.

“Our calculations show that over time, this disciplined approach can lead to significant wealth growth over time, with the wonder of compounding returns working their magic, and reinforce financial resilience.”