I Will Teach You To Be Rich: No guilt, no excuses - just a 6-week programme that works

by Ramit Sethi

Pension Benefit #1: Using Pre-tax Money Means an Instant 20%-plus Accelerator. Retirement accounts offer you a deal: you promise to invest your money for the long term and, in exchange, they give you huge tax advantages. Because the money you’re contributing isn’t taxed until you withdraw it many years later (that’s why it’s called “pre-tax money”), you have much more money to invest for compound growth – usually 20-45% more, depending on your tax rate. Let’s look at a regular investment account (a “non-retirement account”) first. If you open one of these at any investment brokerage, you don’t get many tax advantages: for every £100 you make, you’ll be able to invest only about £20 of it, because, if you are on the lowest tax rate – as most people are – 20% goes to pay your income tax. A pension is different. It’s “tax-deferred”, meaning you can invest the entire £100 and let it grow for about thirty-plus years. Sure, you’ll pay taxes when you withdraw your money later, but that extra 20% turns out to make a huge difference as it gets compounded more and more.