Why holding a pension could be better than holding cash

In this guide, we’ll explore why pensions could offer more value than holding cash, especially when it comes to retirement planning. We’ll look at the benefits of each, the risks to consider, and how pensions can help you feel more confident about your financial future.

Holding cash whether in a savings account, current account, or tucked away elsewhere can feel safe. It’s accessible, predictable, and doesn’t fluctuate in value like investments do.

Benefits of holding cash:

• Immediate access: You can use it whenever you need it.
• No investment risk: The initial amount remains the same, unaffected by market ups and downs.
• Useful for emergencies: It’s ideal for short-term needs or unexpected costs.

But cash has its limits, especially when you’re thinking long term.

Drawbacks of holding cash:

• Potentially low returns: While some savings accounts offer monthly interest payments that benefit from compounding (where you can continue earning interest on that interest), many still provide returns that fall below inflation.
• Missed growth opportunities: Unlike investments, inflation typically doesn’t participate in market growth or generate significant long-term gains.
• Inflation risk: Over time, inflation can quietly reduce what your money can buy.

It’s easy to put off investing, especially when the future feels uncertain. But there’s one quiet force that can eat away at your money over time: inflation.

Even modest inflation can have a significant impact. For example, if inflation averages just 2% a year, £10,000 held in cash could shrink to around £7,450 in real terms over 15 years. If inflation rises to 5%, that same £10,000 could be worth less than half its original value.

That means your money might still be sitting in your account—but it won’t go as far. The cost of everyday essentials, bills, and lifestyle expenses continues to rise, while your cash stays still. Over time, this erodes your purchasing power and could leave you short when you need it most.

At Schroders Personal Wealth, we believe in helping your money work harder. Even low-risk investments have the potential to outperform cash over time. While no investment can guarantee to beat inflation—especially when inflation is high - our portfolios are designed to balance risk and reward, aiming to preserve and grow your wealth. As part of our advice process, we also ensure you have an appropriate amount of cash set aside for emergencies.

Pensions are built to help you save for retirement. They’re not just savings accounts; they’re investment vehicles with built-in advantages that make them a powerful tool for long-term financial planning.

Benefits of pensions:

• Tax relief: For every £80 you contribute, the government adds £20 (basic rate). Higher-rate taxpayers may get even more.
• Employer contributions: If you’re employed, your employer adds to your pension too, boosting your savings.
• Investment growth: Pension funds are invested, giving your money the chance to grow over time.
• Compound returns: The longer your money stays invested, the more it may grow.

These benefits make pensions one of the most efficient ways to save for retirement.

Drawbacks of pensions:

• Limited access: You usually can’t access your pension until age 55 (rising to 57 in 2028).
• Investment risk: The value of your pension can go up or down depending on market performance.
• Complexity: Pensions can feel harder to understand than cash savings.

But with the right support and planning, pensions can offer far more value than cash over the long term.

If you’re saving for retirement, pensions offer several advantages that cash simply can’t match.

• Your money works harder: With tax relief and employer contributions, your pension grows faster than cash savings.
• You benefit from time: The longer your pension is invested, the more it may grow, thanks to compound interest.
• You’re planning with purpose: Pensions are designed to support you when you stop working. They’re not just savings, they’re a strategy.

Holding cash may feel safer, but it often means missing out on growth. Over time, that could make a big difference to your retirement income.

That’s not to say cash doesn’t have its place. It’s important to have an emergency fund - money you can access quickly if needed. Many experts suggest keeping three to six months’ worth of expenses in cash.

Cash is also useful for short-term goals, like saving for a holiday or a home improvement. But for retirement planning, pensions are usually the better choice.

If you’re thinking about shifting from cash to pension savings, here are a few tips:

• Start early: The sooner you contribute, the more time your money has to potentially grow.
• Contribute regularly: Even small amounts add up over time.
• Review your pension: Check your statements and make sure your investments match your goals.
• Get advice: A financial adviser can help you make informed decisions.

Cash offers comfort but pensions offer confidence. They’re built to help you save for the future, with tax advantages, employer support, and the potential for long-term growth.

If you’re holding cash and wondering whether it’s enough, it might be time to consider how a pension could support your goals. By making the switch, or simply balancing your savings, you can take a more purposeful step towards a comfortable retirement.

We’re here to help you explore your options. Let’s talk about what matters to you and how we can help you feel confident about your financial future. Book a conversation with us today by visiting spw.com and scheduling an appointment. It’s a simple step that could make a big difference.

Any views expressed are our in-house views as at the time of publishing.

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Pensions are a long-term investment. The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits, which isn’t guaranteed, and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

Always seek a professional opinion as tax rules can be complex, depend on individual circumstances and are subject to change.

This article is for information only and is not a personal recommendation. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.