Pension savers poised to make most of market rebound can recoup recent losses and make up for years of saving neglect

Rachael Oku

by , VP Brand and Communications

27 May 2020 /  

May 2020

Yellow wooden panelled doors with a locked padlock and chain.

London, Wednesday 27 May 2020: New modelling from PensionBee shows that savers could see a faster recovery of any money lost during the COVID-19 crisis by increasing their pension contributions ahead of a market rebound.

PensionBee, a leading online pension provider, has calculated that savers approaching retirement could make up for recent losses and get their retirement savings back on track, should markets bounce back to their pre-Covid peak values within the next five years.

PensionBee’s modelling shows that if a saver in their 50s, who has the average pension value of £48,456, makes a contribution of £10,000 while markets are down 20 per cent, they could boost their pension by around £53,000 more than if they kept it in cash over a 15-year period. This relies on markets recovering within one year and would amount to an additional annual income of around £2,000 in retirement.

If markets were to recover in three years, based on the same £10,000 contribution, the pension would be £41,500 higher over the 15-year time frame. If recovery took place in five years, which is the amount of time it took to recover following the 2008 financial crisis, savers would be £31,000 better off than if they’d kept their savings in cash.

PensionBee is encouraging savers to think twice before moving their retirement savings to low-risk, low-return funds which as well as offering limited potential for growth, could lock in the recent losses made by markets. To take full advantage of the eventual market rebound, savers may wish to consider increasing their contributions, which will usually be eligible for tax relief. If a basic rate taxpayer makes a £10,000 contribution, this would be increased to £12,500 due to a 25 per cent tax top up from the government.

Romi Savova, Chief Executive of PensionBee, commented: “Time and time again, periods of economic uncertainty have proven to be a great opportunity for investors of all sizes to benefit. Downturns can often enable investors to take advantage of price falls, leading to greater returns during market recovery. While the 2008 financial crisis took c.5 years to recover, it is possible, given the speed of the downturn in this bear market, for markets to recover more quickly, say in one-three years. If savers can afford to make additional contributions to their pensions now, ahead of recovery, they could make up for years of savings neglect and put themselves in a strong position for retirement.”

This information has solely been prepared for informational purposes and not with the intent to influence future investment decisions. As with all investments capital is at risk.


Table 1: Assumptions

Assumption Calculation Source/ rationale
Post-Covid annual pension growth (%) 5% Based on a 5% annual rate of pensions growth
Savings of person in 50s (£) 48, Source: PensionBee
Gross contribution (£) 12,50 £10,000 net contribution and a 25% tax top up from HMRC
Annuity rate (%) 4% N/A
Cash savings rate (%) 1.20% Money Saving Expert

We assume a saver in their 50s makes a gross contribution of £12,500 to their pension while markets are 20% below their pre-Covid peak values. We then consider various scenarios of how the pension pot might recover; these will depend on whether it takes markets 1, 3, 5 or 10 years. Note the 2008 financial crisis took c.5 years to recover, but it is possible given the speed of the downturn in this bear market for markets to recover more quickly, say in 1-3 years. We show what a pension pot might be worth at different points in time without the contribution and with the contribution. We then compare these results to the same £12,500 invested in a cash savings account earning 1.2%. Overall, a pension contribution can boost a pension pot by c.70% relative to an equivalent cash saving, resulting in total additional savings of up to c.£53,000 and additional annual income of c.£2,000. The results become more meaningful the larger the contribution, the quicker the recovery and the greater the savings rate differential.

Table 2: Savings at age 65-70

1-year recovery 3-year recovery 5-year recovery 10-year recovery Cash savings
No contribution 95,940 87,020 78,930 61,843 58,646
With contribution 126,876 115,080 104,381 81,785 73,595
Contribution difference 30,936 28,060 25,451 19,942 14,949
Contribution boost 32% 32% 32% 32% 25%
Pension boost 53,281 41,485 30,786 8,191 N/A
Market boost 72% 56% 42% 11% 0%

Table 3: Income for 65-70 old

1-year recovery 3-year recovery 5-year recovery 10-year recovery Cash savings
No contribution 3,838 3,481 3,157 2,474 2,346
With contribution 5,075 4,603 4,175 3,271 2,944
Contribution difference 1,237 1,122 1,018 798 598
Market difference 2,131 1,659 1,231 328 N/A

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