Retirement matters
How to boost your pension savings and help achieve your retirement goals sooner
Are you ‘mid or late career’ or planning to retire within ten years? If the answer’s ‘yes’, then you probably want to know the answers to these questions: Will I be able to retire when I want to? Will I run out of money? How can I guarantee the kind of retirement I want?
But, for many different reasons, planning for retirement is a commonly overlooked aspect of personal financial planning and this can often lead to anxiety as your age of retirement approaches. We’ve provided some ideas about how to boost your pension savings and help achieve your retirement goals sooner.
Review your contributions
Sometimes the simplest solutions are the most effective. If you want to boost your retirement savings, the simplest solution is to increase your contributions. You may think you can’t afford to, but even a slight increase can make a big difference.
For those lucky enough to receive a pay rise in line with inflation every year, increasing your pension contributions by just 1% could add thousands to your eventual pension pot. The reason why a relatively small increase in pension contributions can result in such a large increase in the value of your pension pot is because of the power of compounding.
The earlier you invest your money, the more you benefit from the effects of compounding. Adding more money to your pension pot by increasing your contributions just makes the compounding effect even better.
Review your strategy
A missed opportunity for many pension holders is failing to choose how their pension is invested. Some people leave this decision in the hands of their workplace or pension provider.
Firstly, you should know that you don’t have to hold a pension with the provider your employer has chosen. You can ask them to pay into a different pension, allowing you to choose the provider while considering the type of funds they offer and the fees they charge.
Secondly, many pension providers will give you several options for investment strategies. If you’re in the default option, you could achieve higher returns with a different strategy (though this will usually mean taking on more investment risk). Note that this may not be appropriate in all circumstances, particularly if you are close to retirement.
Know your allowances
When you save in a pension for your retirement, the government adds tax relief on top of the money you contribute, helping you to grow your savings faster. However, there’s a limit to the amount of contributions you can claim tax relief on each year, which is called your ‘annual allowance’. It’s currently £40,000 (tax year 2021/22), and in some cases may be lower.
If you want to contribute more than your annual allowance into your pension in one tax year (for example, if you’ve received a windfall and want to put it aside for the future), it’s worth knowing that you can use any unused allowance from up to three previous years.
So, if you have £10,000 of unused allowance in each of the past three years, that’s another £30,000 you can claim tax relief on this year. The tax relief on this amount would be at least £7,500, depending on your tax band.
Trace lost pensions
Usually, starting a job with a new employer means starting a new pension. And, when that happens, some people may overlook the pension they had with their last employer. As a result, many people have pensions with previous employers that they’ve lost track of – and rediscovering them can give a huge boost to your retirement savings.
You can trace old pensions by getting in touch with the provider. Look through any documentation you still have from your past employers to see if you can find your pension or policy number. If you can’t, you can contact the provider anyway and they should be able to find your pension by using other details, such as your date of birth and National Insurance number. If you’re not sure who the provider is, start by asking your previous employer.
Imagine you’re retiring today
When deciding when to retire, the most important thing to consider is making sure you have enough money to live comfortably. Imagine you’re retiring today. Will you be able to financially support yourself, and potentially your family too, with your current pension savings?
The run-up to your retirement may feel overwhelming, but this is an important time for you and your savings. So, as you plan for your retirement, you’ll need to look at different sources to estimate how much income you’ll have. These include the State Pension, personal or workplace pension schemes, state benefits you may qualify for on retirement and your savings or investments.
Following the pensions reforms, there are now more options available than ever and this has removed the compulsion to purchase an annuity. It also means that you can use your pension fund to benefit your named beneficiaries, whoever they may be.
Basic retirement lifestyle
If you are approaching retirement it’s time to think about what you’re going to do with the money you’ve been working hard to save all these years. The average UK pension pot after a lifetime of saving stands at £61,897[1]. With current annuity rates, this would buy you an income of only around £3,000 extra per year from age 67, which, added to the maximum State Pension, makes just over £12,000 a year – just enough for a basic retirement lifestyle.
In more recent years, when it’s time to take a retirement income, some people are choosing to do so through pension drawdown. Pension drawdown provides a way to establish a flexible income, set at whatever level you choose, which can be increased or decreased over time to match your needs.
Flexibility and control
For many, this may seem a more fitting solution to their retirement needs than purchasing an annuity, which is a more established option that typically offers a set monthly income for life. However, although pension drawdown offers flexibility and control, there are differences to consider.
While annuity income is fixed for life, pension drawdown can only continue for as long as you have savings remaining – and once they’re gone, you’ll receive nothing. So, it’s important to receive professional financial advice to ensure that you withdraw your money at a rate that will last your expected lifetime.
Will your savings last a lifetime?
It’s important to consider that your retirement could last for 30 years or more, depending on when you retire and how long you live. This is why some people use pension drawdown as the option to provide their retirement income. Your savings remain invested even after you retire, which means they have the opportunity to continue growing through investment returns.
But it’s impossible to predict exactly how much they will grow each year. Some years they will grow more than others, and some years they may fall in value. If your rate of withdrawal exactly matched your growth rate, your savings could last indefinitely. But, because growth is so hard to predict, this is near impossible to do.
How much can you safely withdraw?
A 4% withdrawal rate is typically stated as a guide for how much you can withdraw each year from your retirement savings. This figure is estimated based on the history of the financial markets and how much investments have tended to grow over periods of around 35 years (the expected duration of retirement for someone who retires in their sixties).
So, if you have £500,000 in savings when you retire, 4% would initially equate to £20,000 a year.
However, there are a few additional details that mean this figure can’t be used totally reliably:
- Past performance of the stock markets cannot reliably predict future growth
- The performance of investments in your portfolio may be better or worse than average
- It’s impossible to know for sure how long your retirement will last
- Your financial needs are likely to change over time, typically peaking in early retirement and then in later life
Changing pensions landscape
So, a 4% rate of withdrawal could be either overly cautious, resulting in the accumulation of wealth that could create an Inheritance Tax liability, or overly reckless, resulting in complete depletion of your savings when you still have years left to live.
In this world of ours, very little stands still. The same can be said for the pensions landscape. As high earners are faced with even more restrictions and potential pitfalls, it is vital to understand the rules and seek professional advice.
Ready to take control over your retirement plans?
Whether your retirement is a far-off dream or a soon-to-be-realised reality, the steps you take today can help you enjoy financial independence throughout one of the best stages of your life. To find out more please contact us.
Source data:
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.
THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION WHICH ARE SUBJECT TO CHANGE IN THE FUTURE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.
ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.
Author: Adam Reeves
DipPFS Cert CII (MP&ER)
Independent Financial Planner, Wealth Manager, Director
Last updated on
