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Albert Einstein stated the following about compound interest “He who understands it earns it; he who doesn’t pays it.”

Compound interest relates to what happens to invested money within a pension.

Whatever growth you receive on your investment adds to the underlying capital invested (obviously), but it is surprising when you understand how much of a difference this can make over time. This is why I tell my clients that if they can even 1% more by investing differently this can make a colossal difference and is well worth their time making the change.

Explaining this simply, how long do you think it takes to double your money if you make compounded returns of 10pc a year? The intuitive answer is “10 years” but it actually takes seven. In fact, to double your money in 10 years requires a compound return of only 7% per year.

Looking at it from a more complex angle, if you started with £10,000, what is the difference in final capital from 30 years of investment at 10pc a year compound versus 30 years at 12.5pc a year ? The answer is that the extra 2.5pc of compound return would double the final sum – so £10,000 invested would become £342,000 at 12.5pc as opposed to £175,000 at 10pc

Have you got children? Why not ask your parents to do the following;

If your parents pay £2,500 a year into a pension for only the first two years of your children's life (using £3000 gift allowance) – a total of just £5,000 – and the money then remains invested, growing at 7pc a year with compound interest until you are 70, a fund worth £551,000 will be the result. Now that’s a gift!

The lesson from all these figures is that there is no amount too small to start investing, starting early gives you a huge advantage, and get yourself in funds that have as high a return as possible asap

PLEASE GET IN TOUCH FOR INVESTMENT ADVICE

authored by Elliott Wilson ACSI DipPFS AF3 financial adviser

 

While we keep information on the website as up to date and as accurate as possible, the information on this website does not form part of our advice process. Cambridge Pensions Ltd cannot accept any liability for any decisions made by a client or member of the general public based on any information contained on this website. The value of your investments can go down as well as up and you may get back less than has been paid in.

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