The power of compound growth 

We know about it, we talk about it all the time (at least in the retirement savings world!) but because of the way our brains are wired and the mental gymnastics required to really get our head around the power of compounding, the reality (cliched or not) is that we persistently undervalue its true potential. Our brains are hard wired to think in linear terms and therefore the exponential growth available with compounding does not naturally compute for us.

We assume saving more later roughly compensates for saving less earlier. Add it up and it should come out roughly equal. It doesn’t. The UK Pension Commission’s own modelling shows that someone who starts saving at 40 needs to contribute around 13% of their pay to hit a target replacement rate. Start at 22? You need just 7%. The same retirement outcome. Nearly double the contribution rate required because of the delay getting started. This is a key reason why financial education and pension communication can be so challenging. The numbers that matter most – what happens in the third or fourth decade of saving – feel abstract and unreal to a younger saver, while the near-term cost of contributions feels concrete. Our brains weight the linear present over the exponential future.

I modelled a saver from age 25 to 65 on a starting £27,000 salary, contributing 9% annually with reasonable investment return and salary growth levels assumed throughout their working career.

Final pot: £510,000. Total contributions: £194,000. The remaining £316,000 — 62% of the entire pot — came from investment returns compounding quietly over four decades.

Using the same assumptions, the chart below illustrates this nicely by looking at how the contributions made within each five year age cohort compound over a 40 year working career. Time is a valuable commodity for anyone saving for their retirement and this is highlighted when we consider the contributions in the earliest age cohort (25-29) grow more than 7x by age 65 whereas contributions made in the 55-59 age cohort only have the opportunity to grow by 1.4x by age 65. The total pot accumulates to £510,000 but almost half of this was generated from contributions made in the first 15 years (when the base salary was lower!).

The central tenet that beginning your savings journey early is one of the key ingredients to a successful retirement outcome holds true. This decision can ultimately swamp the impact from a host of other factors that are designed to incrementally improve outcomes for pension scheme members. The UK’s Pension Schemes Act 2026 is largely about driving those incremental improvements (e.g. greater scale facilitating lower charges and enabling access to potentially higher-return investment opportunities). However, rather than seeing these targeted improvements as peripheral to the key decision around when and how much a person saves into their pension, they should be viewed as another crucial part of an individual’s compounding journey.

Take our modelled example above, a 1% improvement in annual returns (due to lower fees and/or better investment returns) results in the final pot at age 65 being £130,000 higher. And that extra £130,000 has the potential to further compound in retirement to meaningfully improve the annual income a person can sustainably withdraw throughout their retirement years.

Ralph Waldo Emerson said “The years teach us much, which the days never knew”.  In a retirement savings context, this quote could reasonably be edited to replace ‘years’ with ‘decades’ and ‘days’ with ‘years’. Small differences in net returns, charges, or time invested can look modest year to year but persistence and patience over decades allows the exponential power of compounding to shine.