Interactive Investor

Consider a mid-life MOT for your pension

27th July 2022 11:44

Katie Binns from interactive investor

Katie Binns explains why you should think about a mid-life MOT and how to improve your retirement plans if you’re not currently investing enough.

The Department for Work and Pensions (DWP) has announced a £5 million boost to its ‘Mid-life MOT’ scheme, an initiative designed to help workers in their 40s and 50s think about their job and skills, personal finances and general well-being, and make an informed plan for later life. Tens of thousands should benefit.

Many of us should consider a mid-life MOT. Last year, an industry report revealed that 90% of workers over the age of 50 face a retirement crisis: five million private sector workers will fall short of an “adequate” income once they leave work, and will be forced to live on less than their expected income, according to research by the think tank Pensions Policy Institute.

Becky O’Connor, Head of Pensions and Savings at interactive investor, said: “Although the definition of ‘mid-life’ brings this government MOT scheme to people earlier in life and that's helpful, if someone is way behind with long-term financial planning at this point, with the best will in the world, it’s going to be hard to play catch up.”

Some employers also offer a mid-life MOT to help you mull over these issues - just ask your HR department. Alternatively, you may decide to consult an independent financial adviser to get some tailored retirement planning advice.

As the cost of living crisis bites, many may feel limited in what they can actually do to improve their retirement plans. Here are some manageable ideas.

One-percentage point rises to your pension contributions count

We already know it’s beneficial to contribute as much as you can to your pension. The tax relief you get – 20% for basic-rate payers, 40% for higher-rate taxpayers and 45% for additional rate payers – is a great boost to your total pension contributions. 

But when times are hard, know that even the smallest of increases to your pension contributions has an impact. For example, if you’re 40 and earn £45,000 a year and get a 1% pay rise, rather than have an extra £30 in your pay packet, increase your pension contribution from 8% to 9% and end up with an impressive £22,000 extra in your pension pot by the time you retire at 65 (this assumes 5% growth). This kind of extra boost a couple of times during your working life can offer a meaningful uplift to your pension.

Use a windfall wisely

You can pay a lump sum into your pension, so if you’re lucky enough to receive an inheritance - or get a bonus - consider paying at least some of it into your pension. The amount should benefit from tax relief, too (up to a maximum of £40,000 total contributions per tax year), so you can see it as a double windfall. And the sooner you invest your lump sum, the more time it will have to grow.

Save up to £12,000 in fees

Savers should check their fees’ on old and current work pensions, according to research by interactive investor that revealed possible average savings of £259 a year (around £12,000 over a working life). O’Connor explains: “Someone with the average pension pot size of £86,232 could save £259 a year on average, over their career, by moving their pension from a provider with typical charges of 0.48% to ii’s Pension Builder, which costs £12.99 a month. That £259 a year - or £21.58 a month - is not like a TV subscription, you don’t get a pension fee coming out of your bank account every month, it’s taken off the pension balance – so you might never even know you are paying it. That money could help pay for other living costs while you’re still getting the all-important investment growth within your pension pot."

Be aware that you can’t just switch away from your current workplace scheme to make such savings, as you could lose your employer contributions. However, your employer might consider paying into a pension you have set up for yourself – you can ask them if this is possible.  If not, then moving old workplace pensions you are no longer actively paying into might also save you a lot in fees. Just make sure you are not losing any valuable benefits first, as some plans come with an option to withdraw more than 25% as a tax-free cash lump sum or have generous guaranteed annuity rates. 

Work longer to contribute more to a pension

If you’re fit, healthy and want or need to continue working, you can obviously delay touching your pension. By working longer, you’ll be paying into a workplace pension for longer which will boost your income when you eventually retire.

For example, if a fit and healthy 58-year-old with a £100,000 pension pot and a paid-off mortgage decides not to tap into her pension at all but continue working, if she works part-time for the next eight years until she is 66 (let's assume she works three days a week on a £45,000 salary) she’ll end up with an impressive £70,000 extra in her pension pot (based on 5% growth and 8% contributions).

Track down lost pensions

More than 1.6 million pension pots worth £19.4 billion remain unclaimed or “lost”, with the equivalent of £13,000 per plan, according to the Association of British Insurers. If you’ve lost track of a pension you had with an old employer, you can use the government’s free Pension Tracing Service. The service will give you the name and contact details of the provider so you can contact them directly.

Boost your state pension

There are also several ways to get an uplift from your state pension including delaying it, making sure you’ve claimed all your national insurance credits and paying extra voluntary credits.

Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.