Our head of pensions and savings shares some of the best pension tips that no one is likely to tell you.
Trying to get to grips with pensions for yourself can feel like learning a language without a teacher. If you want to make 2022 the year you get the better of yours, some of these tips and tricks, which may not be common knowledge, could help.
You could also watch the new ‘Pensions Unpacked’ podcast, from interactive investor and Barnett Waddingham, the pensions consultants, to improve your understanding of pensions this year and ultimately, your own retirement prospects.
Becky O’Connor, head of pensions and savings at interactive investor, said: “Like so many things in life, there’s a lot about pensions that no one tells you. You then end up finding out too late or even not at all. It’s hard to know what you don’t know, but with a little more understanding you might end up with a lot more in retirement.
“We’ve picked out some of the best pension tips that no one – not your parents, partner or employer, is likely to tell you. They won’t all apply to you – they depend on what stage of your pension ‘journey’ you are at, for instance, whether you have just started out in your career or are about to go into drawdown, or already in retirement.
“You certainly don’t need to try and do all 22. Some of the tips are more relevant to workplace pension holders, while some are more suited to SIPP customers. Some focus on investment choices, while some are more about making sure you make the most of tax relief.
“Whichever tip feels most relevant you, why not put it on your January to-do list? Of course, if you don’t have a pension at all, then starting one could come right at the top for you.”
1) Have you been lucky enough to get a bonus or inheritance? Don’t forget you can use ‘carry forward’ to contribute more than your annual allowance to a pension in a year, up to the amount of any unused allowance from the previous three years. The annual pension allowance is £40,000 or up to your annual earnings, whichever is lower. So being able to potentially fill up your allowance for three years is a really nifty way of getting the most possible tax relief on your pension, particularly if you are approaching the age you can access your pension. See - SIPP Contribution Limits and Rules - interactive investor (ii.co.uk), for more.
2) Are you maxing out your employer contributions? Check as you may not be getting the most out of your workplace offer. Some employers will match or even double-match your contributions beyond the 8% auto-enrolment minimum - sometimes significantly more. It’s a good idea, if you can manage the extra and it is on offer, to effectively double up on what you put into your pension through employer matching up to the maximum - it’s free money from your employer that will be waiting for you when you retire. If you don’t earn enough to be auto-enrolled (£10,000 is the threshold earnings for auto-enrolment), you can still opt-in voluntarily to a pension scheme - contact your HR department to ask for this and to find out what level of matching is available.
3) Did you know you can ask your employer to pay into your SIPP instead of your workplace scheme? Some employers will now pay workplace pension contributions into a personal pension of their employee’s choice. So if you have always wanted to build your own investment portfolio but have felt constrained by having to stay with your workplace scheme, it could be time to ask HR if this is an option. There’s nothing stopping you moving old workplace schemes to a SIPP in the meantime, provided there are no restrictions in place, but when it comes to your current one, you really want to keep your valuable employer contributions.
4) If you have a SIPP, consider setting up regular investing. This way, your contribution will be automatically split between a range of investments designated by you and in the proportions you choose, so you don’t have to go in and manually choose your investment allocation every time you make a contribution. Setting up regular investing can help minimise the risk that your contribution is sitting in cash for longer than necessary and is being put to work in the market.
- Read the Great British Retirement Survey 2021 report here.
- Visit our Pensions and Retirement Hub
Pension taxation and relief
5) Don’t forget to claim higher or additional rate relief via your tax return if paying into a personal pension. Basic rate tax relief is added automatically for you, but you’ll have to claim the rest back yourself via your self-assessment tax return. So, if you earn £60,000 and want to contribute £10,000 into your pension one year, £2,000 of that will be basic rate relief and then the remaining £2,000 you are entitled to will have to be claimed back from HMRC directly through your return. You’ll need to do this by January 31 2022 for relief being claimed for the previous tax year (20/21).
6) If you are approaching the next tax bracket and make pension contributions via salary sacrifice, upping your pension contribution can mean you don’t end up paying the extra income tax. For example, the higher-rate tax threshold is £50,270. If you get a pay rise from £50,000 to £53,000, you’d have to pay 40% income tax on the £2,730 above the threshold. If you put your pay rise into your pension, you don’t pay higher-rate income tax now. This tip could come in handy with tax thresholds frozen but wages rising, dragging more people over the thresholds.
7) For those starting drawdown this year, here’s a nifty way to avoid being put on a scary emergency tax code and paying an unnecessarily large amount of tax on your first bit of income. As HMRC has not yet figured out a way to avoid clobbering people in this way on their first withdrawal, forcing them to reclaim the overpaid tax from the Revenue and causing delays to them accessing their cash, a better way around it is to take a small initial sum when you start accessing your pension of, say, £100, to avoid a tax bill on the whole amount you want to take out. Your second withdrawal can then be for the amount of income you require and this should be taxed at the correct rate. If you do end up paying emergency tax, call HMRC as soon as you can to get a refund.
- Pension stories: examine the saving habits and goals of investors at different life stages
- Pensions: is 12% the new 8%?
Inflation and investment choices
8) Is your pension beating inflation? Inflation is running extraordinarily high at the moment at 5.1%, so there’s a chance that returns on your pension are not beating inflation right now. The goal is real returns, not just returns. But don’t panic - it’s something to keep an eye on but not necessarily act on as pensions are long-term investments that should beat inflation over several decades. If it consistently fails to beat inflation, that might be a sign that your risk level needs a review and you may need a higher proportion of equities in your portfolio to get back on top of price rises (although that’s not guaranteed and returns from equities can fall at any time, too, or fail to rise as much as inflation).
9) When you are young, it makes sense to opt for higher growth funds within your workplace pension. Interactive investor research suggests many young people are choosing low-risk funds. But these are unlikely to grow as much and may not even beat inflation. Check what risk strategy your current pension is following and if you are 10 years or so from retirement and it is low risk, consider choosing the medium or even higher growth strategies instead - any dips in the stock market should have enough chance to recover and for you to end up in pocket.
10) Even if you are an older pension investor approaching or in retirement, it’s possible your risk level is too low. It depends when you need the money. With drawdown, you can leave money you don’t intend to take out of your pension for a decade or more invested in a higher proportion of equities, if you wish. The old guidance to de-risk and move into cash as you approach retirement no longer universally applies, although it might if you are planning on buying an annuity or accessing all your cash early on in retirement. So older investors should also re-evaluate their risk levels and check they haven’t de-risked too soon.
11) Similarly, with inflation running high and interest rates remaining low despite the recent small rise to 0.25%, make sure you don’t have more than you need in cash savings. If you don’t need some of the money you have in savings for emergencies or for several years down the line, a more productive home for that money is likely to be a pension or an ISA. If you’re already drawing an income from your pension, you can continue to pay in, as long as your contributions don’t exceed the Money Purchase Annual Allowance (MPAA) of £4,000, which is the limit for those who have already started taking an income.
12) Check whether your current pension fund is sustainable and if it isn’t and you would like it to be, check whether there is a sustainable option on offer. If there isn’t, feel free to write to your pension provider to register your demand for one and in the meantime, you can create your own sustainable pension portfolio with a SIPP, which allows you to invest in sustainable funds, trusts and ETFs, to align your pension with the goal to limit global temperature rises. Interactive investor offers the ACE40 range of ethical funds.
- Your pension: think about it earlier and more often
- ‘No one wants to work til 70’, a student’s view of pensions
Pensions for others
13) Pay into SIPPs for kids and even grandkids. The Bank of Mum and Dad is surprisingly versatile and can fund pensions as well as property. If you want to make a big difference to the future financial security of your loved ones, then payments into SIPPs can be a wonderful gift. If they aren’t earning yet, the contributions will receive basic rate tax relief and up to £3,600 a year can be paid in. But if your adult children happen to be higher-rate taxpayers and you are a basic rate taxpayer, the contribution will receive tax relief at their marginal tax rate rather than yours, so your money is going further than it would if you were paying into your own pension. You need the account number and name of the account holder, plus the relevant form to pay in with.
- Mind & Money: we need to talk about inheritance
- Dinah Wolf: what a 21-year-old really thinks of pension saving
14) Use a pension calculator like this one https://www.ii.co.uk/ii-accounts/sipp/pension-calculator to see if you are on track to retire with the income you want – or even better. Play around with the sliders to see the difference contributions and investment growth can make.
15) Could you retire early? Why not find out if this aspirational goal could possibly be within your reach. If it is, consider ploughing some of your retirement money into ISAs, too. ISAs are the secret to early retirement, because you can access these before your Normal Minimum Pension Age (NMPA) and income from them is tax-free. There’s a £20,000 a year ISA allowance.
16) Talk to your partner about their pension. The couple that plans together, parties in retirement together. What’s in your partner’s pot? How will you plan your joint finances when you are retired and potentially drawing an income from different sources? Have you got joint plans for different pots? What are your joint priorities for retirement? Travel? Leaving a big inheritance? An open dialogue between couples can make managing retirement finances much easier.
- Pensions versus ISAs: a beginner’s guide
- Friends & Family: ii customers can give up to 5 people a free subscription to ii, for just £5 a month extra. Learn more
Drawdown and retirement
17) Many people on fixed incomes will struggle with rising living costs this year. If you are drawing an income from your pension and are considering withdrawing more than usual to cope with rising living costs, check whether your new withdrawal rate is sustainable and if not, consider reverting back to a lower amount if and when costs ease up a bit. You don’t need to keep withdrawing the same amount from your pension every year and many people need less as they get older – worth bearing in mind if you have a strategy.
18) Want financial advice but balk at the cost? There is the option to take tax-free payments out of your pension to cover the cost of advice, through something called ‘the pension advice allowance’. The tax-free amount is up to £500 a session, it’s available at any age and you can use it three times in your lifetime but only once per tax year. The £500 will not be taxed on withdrawal from the pension pot, regardless of your income.
19) If you are approaching the age at which you can access your pension and are confused by the complicated array of options available to you, book an appointment with Pension Wise. It’s a very useful free service from the government and it will get you past ‘Go’ with your planning. https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise?source=pw
20) If you are on a low income in retirement, check whether you are entitled to Pension Credit. If you are, your income could be topped up to a more liveable amount. You can be in receipt of some state pension and even have some savings and still be entitled to Pension Credit. https://www.gov.uk/pension-credit.
- ii Top 10...things to keep in mind when managing your own SIPP
- Subscribe for free to the ii YouTube channel and catch all our latest interviews and video content
Other important admin
21) Fill out your Expression of Wishes form so your pension goes to the right people or charities when you die. Also remember to update Expression of Wishes forms for old pensions. This is important because your pension is not part of your estate and so isn’t technically covered by what is in your will.
22) Check your state pension entitlement based on your current National Insurance contributions to see if you are on track for a full state pension - https://www.gov.uk/check-state-pension.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.