Two-thirds of a typical pension pot is accrued from investment returns – not the amount of money saved in each month, a new study from Standard Life has found.
Some £65,000 out of every £100,000 saved comes from investment growth, while just £18,000 is from individual contributions, the study said.
This is followed by a further £13,000 from employer contributions and £4,000 in tax relief, as the below chart shows.
Yet only one in four people are aware of the significance of investment growth, with three-quarters of 6,000 people surveyed stating they were unaware that returns were the largest driver of the portfolio.
Around two in five respondents (39%) thought it was their individual contributions that accounted for the largest part of the pot, while a quarter expected it to be employer contributions.
Jenny Holt, customer savings & investment director at Standard Life, said: “Compound investment growth can be one of the most powerful forces in pension saving, but our research suggests many people underestimate the role it plays.
“Contributions are important, but the real benefit often comes from giving those contributions time to grow and generate returns over decades.”
This is why it is crucial to start early, she said, as even small contributions made at the start of a career can have huge long-term potential thanks to the effects of compounding.
Conversely, “delaying saving can mean missing out on the years when your money could have been working harder for you”, said Holt.
It comes as more people are putting off retirement funding altogether, with one in five respondents suggesting that retirement planning is something they will worry about later in life.
This rises to more than a third (35%) among Gen Z, despite younger savers potentially having the most to gain from giving their pension longer to grow.
Indeed, someone who starts working on a salary of £25,000 and pays minimum monthly auto-enrolment contributions (5% employee, 3% employer) from age 22 could build a total retirement fund of £210,000 by age 68, adjusted for inflation.
Waiting until age 27 to start contributing could result in a total pot of £170,000, £40,000 less, as the money has less time to increase.
Source: Standard Life.
Holt concluded: “Of course, people need to balance pension saving with day-to-day costs and shorter-term goals, especially in the current high cost of living environment, but where finances allow, engaging with your pension early, checking what is going in, and making the most of any employer contributions available can help give investment growth the best chance to boost your retirement savings over time.”