Making the most of these simple pension hacks will make your retirement pot as big as possible.
With the immediate financial pressures of Covid-19 weighing heavy on many of us, it can be easy to ignore long-term saving for retirement.
But while we are temporarily forced to stay home rather than enjoy meals out, or to cut back on reduced incomes, these restrictions can become permanent in later life without a healthy pension.
Luckily, some underused tricks can help you boost your pension and enjoy a relaxed retirement.
“Starting young gives you a good 40 years of potential growth, you can take higher risks as you have a long term over which to invest, and a small difference in returns can have a significant impact over time,” says Anna Sofat of advice firm Progeny.
Someone aged 21 on a £30,000 salary saving 10% (£3,000) a year into a pension, with a reasonable annual return of 4%, could build a pot of £296,480 by age 60, according to Progeny’s calculations. A return a little higher, at 5% over four decades, grows the pot by an extra £84,000.
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Fire up your 50s
Our 50s are a good time to maximise retirement savings, as many of us will be at our peak earnings potential.
Consultancy LCP calculated that a worker aged 55, on the UK average salary of just over £30,000, contributing the auto-enrolment minimum, could retire aged 67 with a pot £16,000 bigger by adding just another £100 a month. With a higher salary and greater contributions, the gains are even greater.
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Kay Ingram of adviser LEBC says: “’Carry forward’ is an older saver’s ally. You can fill up unused annual pension allowances from the previous three years, handy when you hit peak earnings.
“You must have a pension open to contributions, so keep a plan with some savings going in so you can sweep up tax relief from earlier years.”
Higher rate taxpayers should act fast. “Higher- and top-rate tax relief may face attack in the 2021 Spring Budget to pay for Covid-19,” Ingram warns.
Pension savings also cut the income assessed for the personal tax allowance of £12,500 (withdrawn for earners over £100,000 to £125,000), which could leave you even better off.
Get a grip on fees
High fees and charges are terrible for pension growth. Paying 1% less in charges a year over 20 years could mean nearly £50,000 extra in your pension at retirement, according to financial advice firm Open Money. This assumes 5% growth a year before fees on a £100,000 pot.
With Covid-19 hitting markets, cutting investment costs is even more vital. “The impact of high charges is prevalent in times of poor market performance,” says Hayley Millhouse of Open Money, “as negative returns will be compounded by the deduction of high fees and charges, taking pension pots longer to recover.”
Your pension statement should show how much you pay in fees and the impact on your pot.
One big pot beats many small pots
Merging your pension pots into one can cut your fees (you only pay one set of charges) and boost the benefit you get from compound growth (a bigger pot can grow faster and further than lots of little pots).
Shelley McCarthy of adviser Informed Choice has run the numbers. Say you have a £100,000 pot and a £50,000 pot. Leave them separate and you could have around £346,000 after 20 years. However, consolidating for higher growth and lower charges would leave you nearly £33,000 better off.
“This will not always be the case as some company schemes have very beneficial charging structures and you need to ensure you will not lose any guarantees by consolidating,” McCarthy cautions.
Pay rise perks
For those lucky enough to get a pay rise in line with inflation every year, increasing your pension contribution in lockstep with this can make a big difference.
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Advice firm Logic Financial says that over a 42-year working life, increasing a £200 per month pension contribution every year in line with the retail price index (RPI) could create a pot £72,000 bigger by retirement at 67.
For a £500,000 pension pot, when increasing contributions in line with RPI, you would need to save a fairly modest £449.60 a month (net of basic rate tax relief).
Bridge the gender gap
Maternity leave, working part-time to raise a family, caring for elderly relatives, divorce and the gender pay gap can all hit women’s finances hard. On average, women have pensions a third smaller than men’s.
Employed women should stay in the company pension scheme while on maternity leave – in some schemes employers must pay in for the whole period, at no cost to you.
“Non-working women can still contribute £3,600 gross a year so I always suggest money be set aside from the family income for that, where the other partner is earning,” says Kaye Price of KP Financial Wellbeing.
Parents claiming child benefit get an automatic national insurance credit, worth £260 a year of state pension; non-working parents must claim it or lose it.
If you are waiving child benefit because a partner earns more than £60,000, be aware you can still claim, then refuse payment to get state pension credits.
For those caring for an adult for at least 16 hours a week and under state pension age, claim pension credits even if you don’t qualify for carer’s allowance.
Avoid the entrepreneur’s mistake
The self-employed frequently do not save enough towards retirement.
“Start a pension as soon as you start making a profit,” advises LEBC’s Ingram, “contributions start from £20 a month, and when your profits grow you can add more with the benefit of tax relief”.
Getting even a small pension started is important – you can claw back tax relief you missed on earlier years’ profits (up to the last three) only if you had a pension open for savings during that time.
Buy more state pension
State pension entitlement is based on national insurance (NI) contributions (check yours at https://www.gov.uk/check-state-pension).
“Individuals not in work, or who have spent time out of work, will have gaps in their NI record, but can ‘buy’ years to compensate as ‘voluntary class 3 NI contributions’,” advises Victoria Nabarro, a fellow of the Personal Finance Society.
One full year’s NI entitlement currently costs £15.30 per week (£795 per year).
Reaching retirement age after 6 April 2016? You could boost your entitlement by up to 10 years.
Most people can make voluntary NI contributions for the previous six tax years, if not further. A 43-year-old man entitled to £106.47 per week in today’s terms can increase this to £164.35 (an extra £3,000 a year) by ‘buying’ another 13 full NI years.
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Deferring payment of your state pension could also reap rewards.
The state pension (for those eligible after April 2016) increases by 1% for every nine weeks it is deferred, so by 5.8% for a year.
“This requires an individual to live much longer to make it worthwhile, and may lower entitlement to other state benefits,” cautions Nabarro, “another option is to claim the state pension and invest it until required”.
Savvy savers are refusing to be thrown off course by the financial disruption of coronavirus, with most keeping up pension contributions despite knocks to household budgets, according to research by YouGov and The People’s Pension in October.
Follow these pension hacks and your long-term retirement goals will stay on track too.
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