FIVE WAYS TO MAKE YOUR PENSION WORK HARDER
Whether you’re nearing retirement or still have many working years ahead, there’s no better time to take steps toward a more comfortable future.
Rumours of changes to the way pensions are taxed in the Budget will also lead people to start considering how their pension plan is performing – and what changes they might need to make.
It always pays to strengthen your pot, no matter how much you’ve saved so far.
Fortunately, there are several smart ways to grow your nest egg and help secure a better quality of life when you eventually stop working.
How much do you need for a comfortable retirement?
What counts as a comfortable retirement depends on your own expectations and lifestyle.
To help people picture what that might look like, Pensions UK has developed its own set of retirement living standards, outlining the kind of lifestyle different income levels can support – and what they’ll cost.
If your goal is financial freedom with a few luxuries – think regular takeaways, a two-week four-star holiday in the Med with spending money, UK weekend breaks, and enough spare cash for clothes, gifts and charitable giving – you’d need around £43,900 a year per person.
With around £12,200 less a year – at £31,700 – you could still enjoy what the association describes as a moderate retirement. This includes meals out once a week, a two-week three-star all-inclusive trip to the Med, a long weekend away in the UK off-peak, and a little money left over for the occasional treat.
There is also a minimum retirement option, for those who have saved less, in which someone can live off £13,400 a year. However, this would only allow the person a small amount for luxuries and doesn’t include a car or an abroad holiday.
So how can you boost your pension?
Engage with your workplace pension
While some experts, including Gary Smith, financial planning partner at wealth management firm Evelyn Partners, believe it’s unlikely that pension tax relief will be scaled back in the November Budget, the speculation serves as a reminder that this valuable benefit may not last for ever.
It’s a timely prompt for people at all income levels to consider whether they could be doing more to add to their pension pot.
One practical step is to take a closer look at your workplace pension, which most employees now have through auto-enrolment, and check where your money is invested.
Smith said: “Many will find they’re in a default multi-asset or lifestyle fund that may not be working as hard for them as other options.”
Getting advice from experts on where best to invest your money could help to boost your retirement savings considerably.
Devote pension cash to global equities
While there’s plenty of talk about stock market bubbles – where prices head above their valuation – those in their twenties or thirties still have decades before retirement.
For many, investing some of their pension in global equities – shares or stocks in publicly traded companies from countries around the world – can deliver “a long-term boost through investment growth”.
He added that even people in their forties or fifties who haven’t paid much attention to where their pension is invested could see better returns simply by reviewing and adjusting their funds.
Seeking advice on which funds match your investment plan and risk factor can help in the decision making process.
Maximise what you can get from the state pension
For many people, the state pension forms a cornerstone of their retirement income.
That’s why it’s vital to make sure you’re getting the full amount you’re entitled to, former pensions minister and now LCP partner, Sir Steve Webb, said.
Speaking to The i Paper, he explained: “Getting the basics right is worthwhile, which means making sure you know your state pension age, and also checking your state pension forecast and your national insurance (NI) record for errors.
“Making the most of free NI credits is the best way to boost your state pension, as well as exploring topping up through voluntary contributions if you are likely to be short.”
Employer matching contributions
Anyone not taking full advantage of their employer’s pension matching is missing a valuable opportunity to grow their retirement pot, Smith said.
He explained that even a small increase in personal contributions can deliver a double benefit – a matching boost from your employer and tax relief on the total amount.
At present, UK employers must pay a minimum of 3 per cent of qualifying earnings into a workplace pension, while employees contribute 4 per cent, with 1 per cent added in tax relief – making a total minimum contribution of 8 per cent.
For those enrolled in a salary sacrifice scheme, the potential gains are even greater. “If you’re not already using one, it’s worth asking your employer whether it’s an option,” Smith added.
Annual bonuses
Those in roles where an annual bonus forms part of their pay package can often choose to have it paid directly into their pension.
For anyone whose salary is taxed at the higher or additional rate – or if the bonus pushes them into those brackets – “this can be a smart move”, Smith said.
He continued: “This will boost their pot while also meaning they keep all or most of their earnings, rather than losing a large chunk in tax.”
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