What return do I get on my pension?

Impressive pension returns

There's a raging argument going on at the moment: what's the best place to put your money for retirement? Some individuals will advocate that investing in the stock market or buying investment property is the best route to a prosperous retirement.

Is a pension a bad investment?

The individuals that advocate handling your own retirment investments argue that the returns offered by pension funds are poor, normally a couple of percent per year if you're lucky. They would much rather buy an investment property and earn a rental yield of 5% plus any capital growth from increases in the value of the property over time. This can be a lucrative strategy and is a well trodden strategy for wealth creation and a safety net for retirement.

Why a pension is better than any other investment for your retirement?

The argument that a pension only earns a couple of percent per year is a fallacious argument. It completely ignore the fact that most companies match the contributions made by their employees into their pension. It also ignores any reduction in income taxes resulting from contributions into a pension scheme saving you money today.

You're probably wondering what the actual returns are from a pension. I can only tell you what I've experienced in terms of pension returns. I have put into a pension since the day I started working over four years ago.

In my first job my company matched up to 6% of my gross salary per month into my pension. I was contributing £135 per month and my employer matched that amount. After my first year I got a small salary increase and started contributing £160 per month, maximising the 6% contribution matching scheme. My employer matched that £160 contribution. After my second year I was given another small salary rise and was contributing £217.25 per month, with the company matching. Since that time I have moved jobs. My new employer matched up to 8% of my gross salary into a pension. Once again I maxed out this benefit contributing £320 per month into a pension and my employer matching that contribution.

After just a little over four years, without thinking about it I sacrificed just over £9,000 in salary to make contributions into my pension. However, the incredible thing is that my pot stands at about £20,000 already. How did this happen? This occurred mainly through the matching scheme. The matching effectively doubles your investment  over night. That's a 100% growth wth no risk! You can't get that elsewhere in the market.

This growth also happened because the interest compounded over time. Additionally I was earning interest on my employers contribution effectively doubling my interest return. So even if I only got 2% a year in interest, in reality this was doubled to 4%. 

I've calculated what rate of return I would need over those four years from any other investment to turn £9,000 into £20,000. You'd need to find an investment that can generate a return of over 19% per annum. There is virtually no other product out there in the market place available to retail investors (that's you and me) that can offer a compounded return of 19% per annum.

You'd be mad not to put into a pension scheme if you have the opportunity to have your company match your contributions. Notice that I haven't even mentioned the tax saved today by putting into your pension saving you an additional 20p in tax for every 80p put into a pension if you're a basic rate tax payer.

You're probably still thinking about building that property empire instead of putting into a pension because it seems sexier. Do me a favour. Do both. Maximise your pension contributions to take advantage of the company matching scheme. Then start to save for that property empire!

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