Younger workers could potentially turn a proposed one-year State Pension cash-out into a retirement pot worth almost £1 million, according to analysis from investing and trading platform IG.
Reports this week suggested ministers are considering proposals that would allow workers with at least 10 years of National Insurance contributions to exchange one year of State Pension entitlement for a lump sum payment of £12,548.
IG analysed how that lump sum would have performed if invested in major stock market indices over the past 30 and 40 years. The analysis found that a 28-year-old investing £12,548 and leaving it untouched until age 68 could have seen the money grow to £984,179 if invested in the S&P 500. The same investment would have reached £423,463 in the MSCI World Index and £199,829 in the FTSE 100.
Even over a shorter 30-year investment horizon, starting from 1996, a £12,548 investment would have grown to £280,906 in the S&P 500, £174,752 in the MSCI World and £85,485 in the FTSE 100.
It should be noted that these figures are not adjusted for inflation. According to the Bank of England’s inflation calculator, £12,548 today would be equivalent to approximately £25,862 in 1996 and £38,484 in 1986. While the stock market returns shown above comfortably outpaced inflation over both periods, the comparison highlights the importance of considering the changing value of money when assessing long-term investment performance.
Table shows returns from key stocks indices based on historical performance
| Index | Value after 30 years (invested in 1996) | Value after 40 years (invested in 1986) |
| S&P 500 | £280,906 | £984,179 |
| MSCI World | £174,752 | £423,463 |
| FTSE 100 | £85,485 | £199,829 |
*Data taken from xxx. Past performance is not an accurate indicator of future results
The findings highlight the long-term power of investing and compounding, particularly for younger savers with decades until retirement. While a guaranteed State Pension income provides certainty in later life, historical market returns suggest that some investors may have been able to generate substantially greater wealth by investing a lump sum over the long term
Aaron Bright, Analyst at IG, said: “The proposals currently being discussed raise an interesting question about how younger workers balance guaranteed retirement income against the opportunity to build wealth through investing.
“For younger people with decades until retirement, time is one of the most valuable assets they have. History shows that investing over long periods has often delivered returns that outpace inflation and cash savings, thanks to the power of compounding“
“The purpose of this analysis is to illustrate the long-term trade-offs that younger workers may wish to consider if proposals such as these were ever introduced. Any decision would need to weigh the potential for investment growth against the value and certainty of future State Pension income.”
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