Keeping on top of your retirement savings isn’t the easiest task at times, as anyone who’s frequently changed jobs may have found. Every time you switch employer, you’re enrolled on to a pension scheme, increasing the risk of savings being misplaced, neglected, or even lost.
However, a significant development last week aims to solve this growing problem. In a potentially groundbreaking shake-up to the retirement landscape, Chancellor Jeremy Hunt announced in his Autumn Statement that the government will consult on a “pension pot for life”.
Put simply, this would allow you to ask your employer to pay into a pension of your choice, instead of being forced to join your company’s scheme.
The concept of a “pot for life” has obvious upsides. It would ease the administrative headache that comes with maintaining multiple pensions and give you more control over how and where your savings are invested.
But the details are wafer thin at this stage, plus there’s no guarantee the policy will see the light of day. Even if rubber-stamped by the government, it may take several years before the existing workplace regime is overhauled and replaced.
In the meantime, whether the project comes to fruition or not, it’s important to engage with your current retirement savings now to make sure they’re in the best shape. Here are seven steps to steer you in the right direction while we wait to learn more.
1) Track down lost or misplaced pensions
From age 18 to 24, people change jobs 5.7 times on average, and roughly 11 times throughout their career. This helps to explain why some three million pension pots, collectively worth a staggering £27 billion, are lost or unclaimed.
While the “pension pot for life” would reduce this problem in the future, tracking down those that are currently in the ether still rests on your shoulders. The pensions dashboard - which will enable you to view all your pensions in one place - will prove a big help on this front once it’s launched in three years’ time.
- Autumn Statement 2023: what does it mean for you?
- Have you lost or misplaced a pension? Here’s how to find it
I recognise that hunting for lost pensions might be a chore, but it’s worth the effort. What’s more, some pots might be bigger than you assume, especially older ones that have had many years to grow.
2) Consolidate existing plans (if it makes sense)
Merging various pensions in a single plan can bring several benefits. It can make keeping track of your savings far easier, enable you to adjust your investment strategy periodically, and you could also save on costs; particularly if you use a flat-fee provider where annual platform charges are the same no matter the size of your pot. Lower fees mean you get to keep more of the money you make.
You should, however, tread carefully when seeking to bring several pensions under one roof. In some cases, transferring out of old schemes might make things simpler, but could be costly.
For instance, if existing pensions have valuable guarantees, such as those offered by defined benefit (DB) schemes or old-style retirement annuity contracts, it’s often best to stay put.
As pension consolidation can be a delicate area, with severe penalties for making the wrong choice, it can be worth taking professional advice.
3) Review your investment strategy
Selecting the right investments at the right time is key when saving for later life.
As a rule of thumb, the longer your investment time frame, the more risk you can afford to take. But as you approach retirement, your capacity to bear investment losses may reduce, and so a more balanced investment strategy may be more appropriate.
For instance, if retirement is several decades away, hefty weightings towards bonds instead of shares can stymie your pot’s growth potential at the time when you need it most. A lack of regional or sector diversification can also harm returns.
With pensions from previous employers, the investments you chose at the time, which could well be the scheme’s default fund, might not be the best option. Take the time to review where your money is invested and make changes if necessary.
4) Maximise employer contributions
Under current auto-enrolment rules, if you pay 5% of qualifying earnings into a pension your employer must pay 3%. However, some employers offer to contribute much more, although you might have to match what they pay. Check with your employer to see how much they’re prepared to contribute.
As employer pension contributions are effectively free money, making the most here is a simple way to give you savings pot a shot in the arm. What’s more, you get pension tax relief on what you pay in at your marginal rate of tax, which means that both your employer and the government take on some of the heavy lifting.
5) Consider saving more, especially if you pay lots of tax
The "pot for life" may make things simpler, but it's still important to take control of how much you save.
While auto enrolment has proved an undeniable success, sticking to the minimum contribution levels might not be enough to secure you a comfortable retirement.
And even if your employer offers a particularly generous pension scheme, making extra personal contributions can still make a lot of sense; especially if you pay higher rates of income tax.
Most people can pay the lower of £60,000 or 100% of earnings into a pension every year and get tax relief at their marginal rate, which could be as much as 45%.
In some cases, the perks stretch beyond tax. Child benefit payments start to reduce once income exceeds £50,000 a year, while your personal income tax allowance - the amount you can earn before paying tax - disappears if you earn more than £125,140 a year. But as pension payments have the effect of reducing your taxable income, topping up your savings could allow you to keep these valuable benefits. In some cases, the combination of tax relief and retained benefits or allowances could result in an effective saving of more than 60%.
6) Gain a yardstick with a pension calculator
Gaining clarity about what your current savings could provide in the future can not only can help avoid a nasty shock down the line, but also will enable you to identify the action needed to address any shortfall.
Pension calculators, such as this one from interactive investor, can reveal how much progress you’ve made so far. Just punch in your target retirement income, the combined value of your current savings, your expected future contributions, and select an assumed growth rate to gauge whether your goals are on track.
7) Complement your pensions with ISAs
The attractive tax perks that come with pensions mean they are an obvious choice to home the bulk of your retirement savings. However, one drawback is that the earliest you can access the money is age 55, rising to 57 from April 2028.
To widen the options within your retirement portfolio, it can be prudent to complement your pension pot with accessible investments, such as individual savings accounts (ISA). Last week, the chancellor unveiled a raft of new reforms to simplify the ISA landscape, which will take effect from April 2024.
ISAs may not offer the same generous up front tax benefits as pensions, but they do shield gains and dividends from HMRC, and unlike pensions you can get your hands on the money whenever you like without the taxman taking a penny.
Beefing up your ISA portfolio can allow you to leave your pensions untouched until you need them. For example, if you have outstanding debt you aim to clear before stopping work, dipping into your ISA instead of your pension will give the latter more time to grow. This can increase your future retirement income and boost your pension tax-free lump sum when you eventually retire.
ISAs can also provide some useful tax-free income in later life to supplement taxable income sources such as drawdown, annuities, buy-to-let properties, and the 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.
Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.