Millions of UK pension savers could be missing out on tens of thousands of pounds in long-term returns by delaying contributions until the end of the tax year, new data from digital pension provider Penfold had suggested.
The start of a new tax year is a natural catalyst for pension savers to make sure they are making the most of their annual pension contribution allowances. Paying into a pension before tax year end makes sense as unused annual allowances can’t always be recovered (beyond the carry forward rules).
But while this behaviour has become a consistent annual trend, it may come at a high long-term cost.
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Take someone investing £10,000 at the start of each tax year. Over 25 years they could end up with around £24,000 more than someone who waits until the end of each year to contribute the same amount, assuming 5% annual growth, according to Penfold’s calculations.
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Chris Eastwood, CEO at Penfold, said: “We see this pattern every year. Many people top up their pension close to the tax deadline.
“It’s great to see people taking action. But starting earlier gives your money more time to grow, and that can make a real difference over time.”
Paying into a pension before tax year end
Analysis of contribution behaviour on Penfold’s workplace pension has revealed a clear pattern of last-minute saving.
One-off pension contributions in March reached up to 4.4 times the average monthly level seen throughout the rest of the year.
This means a disproportionate share of pension saving is concentrated at the end of the tax year, with around one in five (around 22%) of annual contributions made in March alone.
The data also shows the average contribution value in March is around three times higher than in most other months.
But those who leave paying into a pension to the last minute with a one-off lump sum could be missing out.
How pound cost averaging could boost your pension returns
Waiting until the end of the tax year to make a one-off large contribution to your pension – rather than investing regular smaller sums – not only potentially gives your money less time to grow, it can also mean you miss out on the advantages of pound cost averaging.
Standard Life gives an example: if you invest a lump sum of £12,000 and the market then drops over the next year, your investment could end up down 10%.
But if you spread that investment out and invest £1,000 each month across the year and the market drops in the same way, then you buy into the market at a lower price each time, meaning your overall investment may only drop by 5% in total.
Though if markets rise rather than fall over the same period, you’ll make smaller profits than you would have if you’d invested the lump sum.
In contrast to one-off contributions, Penfold’s data also found regular monthly contributions remain broadly consistent throughout the year, which can help with long-term saving habits over last-minute decision-making (though all pension contributions are a good idea).
“The new tax year is a good moment to reset”, Eastwood from Penfold said. “Contributing earlier and more consistently can help savers make the most of compounding and build stronger financial futures.
“Small, regular contributions throughout the year can be a simple way to build a bigger pension over time.”
