Is It Worth Paying into a Pension for 5 Years

Is It Worth Paying into a Pension for 5 Years?

You might be wondering whether it is worth paying into a pension if you only have five years left until retirement. The answer is yes. Even a relatively short period of saving can help boost your retirement income, particularly when you take tax relief and employer contributions into account.

This article explains the benefits of paying into a pension for five years, how much you might build up, and what other advantages it brings.

Can a pension make a difference in 5 years?

Yes. While pensions work best when invested over the long term, five years can still be enough to make a meaningful contribution to your retirement savings. It can be especially beneficial if you are:

• Getting tax relief on your contributions

• Receiving employer contributions

• Keeping your money invested for growth

• Delaying withdrawals to give your fund more time to grow

How much could I save in 5 years?

Here is a basic example:

• You contribute £200 per month

• You receive 20 percent tax relief, which means your total contribution is £250 per month

• With a modest 4 percent annual growth

• Over five years, your pension could grow to approximately £17,000

If your employer adds contributions, the total could be significantly higher.

Even if you contribute for a short time, that amount could cover several years of modest retirement spending or help reduce the amount you need to withdraw from other sources.

What are the key benefits?

1. Tax relief

For every £80 you pay into your pension, the government adds £20, meaning a 25 percent immediate return on your contribution. Higher and additional rate taxpayers can claim even more through Self Assessment.

2. Employer contributions

If you are in a workplace pension, your employer is likely to match your contributions up to a certain level. This is free money towards your retirement fund.

3. Investment growth

Even over five years, your pension pot has the opportunity to grow through investment returns. The longer you leave the money invested, the more time it has to compound.

4. Tax free lump sum

You can usually take 25 percent of your pension pot as a tax free lump sum when you reach retirement age. This can be useful for clearing debts, funding a major purchase, or simply providing a financial cushion.

Is it worth it if I am self employed?

Yes. If you are self employed, you will not benefit from employer contributions, but you still receive tax relief on your contributions. Even small, regular payments into a personal pension or self invested personal pension (SIPP) can build up over five years and give you more flexibility when you retire.

What if I plan to retire soon?

If you are within five years of retiring and are just starting to save, contributing to a pension can still help:

• Reduce your tax bill

• Build a pot that can supplement your State Pension

• Provide access to a tax free lump sum

• Allow flexible withdrawals once you reach pension access age (currently 55, rising to 57 from 2028)

It is important to balance this with other financial needs, such as paying off debts or saving in an accessible account for emergencies.

Are there any risks?

As with all investments, there is a risk that the value of your pension pot could fall, particularly if markets are volatile in the short term. However, pension funds intended for those close to retirement are usually invested in lower risk assets to help protect against sudden drops.

You should also be mindful of the Money Purchase Annual Allowance, which may limit how much you can contribute if you have already started taking income from another pension.

Final thoughts

Paying into a pension for five years can still be very worthwhile. Even if you are close to retirement, your contributions can grow with tax relief and investment returns, and you can benefit from a tax free lump sum. If you are in a workplace scheme, employer contributions add even more value.

Whether you are topping up your savings, making up for lost time, or starting from scratch, it is never too late to invest in your financial future. Consider speaking to a financial adviser or using the free Pension Wise service to understand your options and get the most from your final years of saving