The new tax year provides an ample opportunity to give your investments a spring clean and it may even be worth increasing your investment contributions.
New research suggests upping how much you put into investments such as an ISA in line with inflation could boost your portfolio by up to £100,000 over 40 years and even more in a pension as you will benefit from tax relief.
Many workers received a pay rise last year and while the rate of inflation is slowing, upping your contributions in line with at least the cost of living measure target of 2% could be a worthy investment in your future.
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“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,” says Alice Guy, head of pensions and savings at interactive investor.
“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.”
What difference does a 2% increase in ISA contributions make?
Investment platform interactive investor has analysed how much an investment portfolio could grow by when increasing contributions by 2% each year – in line with the Bank of England’s inflation target.
Assuming 5% investment growth, 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% annually.
In contrast, keeping your contributions at the same level would leave you with around a £100,000 smaller pot at £298,000
There are also benefits to starting your ISA early this tax year.
| Investment wealth compared | No contribution increase | Increase regular contributions by 2% each year | Additional investment |
|---|---|---|---|
| After 10 years | £31,005 | £33,680 | £2,675 |
| After 20 years | £81,508 | £95,914 | £14,407 |
| After 30 years | £163,772 | £206,277 | £42,505 |
| After 40 years | £297,771 | £397,002 | £99,231 |
Hargreaves Lansdown research shows that someone who invested their full ISA allowance on the first day of the tax year every year for the past decade would have seen their investments grow to an impressive £360,500 compared with £322,500 if you had left it to the last minute.
What difference does a 2% increase in pension contributions make?
Increasing contributions has a significant impact for pension savers as you also benefit from tax relief.
A pension saver contributing £250 each month - made up of a £200 contribution plus £50 tax relief - could end up with around £124,000 more pension wealth by retirement if upping their contributions by 2% each year, according to interactive investor.
The investor would have a retirement pot worth £496,000 after 40 years compared with £372,000 when not increasing contributions.
| Pension wealth compared | No increase in regular contributions | Increase regular contributions by 2% each year | Additional investment |
|---|---|---|---|
| After 10 years | £38,756 | £42,100 | £3,344 |
| After 20 years | £101,884 | £119,898 | £18,013 |
| After 30 years | £204,715 | £257,859 | £53,145 |
| After 40 years | £372,214 | £496,285 | £124,070 |
How to increase your pension contributions
Your pension contributions will automatically increase if you are in a workplace scheme and have recently received a pay rise as more will be going into your retirement fund as a percentage of your salary.
You could still ask to increase your contributions further though.
If you have your own private pension or a self-invested personal pension then you will need to increase your contributions yourself via the platform.
Also look out for the fees you pay and keep an eye on fund performance as this can all influence the value of your pot.
“Of course, life isn’t straight forward, and it isn’t always possible to up your pension contributions every single year,” adds Guy.
“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.”
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