By Katie Binns
You may be looking to boost your pension savings if you're worried you haven't saved enough for life after work.
Your pension is your income for when you stop working, yet millions of us simply do not save enough.
Whether you’re planning to travel the world, spend more time with family, take part in your favourite hobby, or learn a new skill, there are various ways you can increase your nest egg, sometimes with minimal effort.
The average UK pension pot stands at £61,897, according to the Financial Conduct Authority. With current annuity rates, this sum would provide an annual income of £3,000 from age 67. If you add that to the state pension (worth £9,339 a year if you qualify for the full payout), you’ll have about £12,000 a year for retirement.
It doesn’t sound like much, does it? Think about how much you earn now, and all the things you’d like to do when you finish work. Most people need to save more to fund a decent lifestyle and to realise their retirement dreams.
Here's 10 ways to enhance your pension savings.
1. Use your payrise to boost your pension savings
To boost your pension savings without noticing is to divert any small pay-rises into it. If you earn £30,000 a year and get a 1% pay rise, and increase your pension contribution from 8% to 9% you could end up with an astounding £20,928 extra in your pension pot by the time you retire, according to Hargreaves Lansdown.
This is based on a 30-year-old, and assumes investment growth of 5% each year, according to calculations by the investment platform Hargreaves Lansdown.
If you keep the 1% pay rise for your pay packet in this example, you’d only be looking at an extra £20 a month.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, says: “These figures show the enormous impact of making even the smallest of increases to your pension contributions. By giving up a few pounds today you can end up with thousands of pounds more in your pension when you come to retire in the future.”
2. Get your partner to boost your savings if you’re not working
One of the great things about saving into a pension is that nearly everyone gets tax relief, in other words, free cash from the government. Even if you’re not working, you can still save up to £2,880 into a pension each tax year, plus you’ll benefit from £720 of tax relief - that’s £3,600 in total. If you don’t have the spare cash to pay into a pension, your spouse could do it for you - or a relative or friend. Anyone can set up a pension and pay into it for someone else.
3. Consolidate your pensions
Workers are on average likely to have 10 jobs over their professional lives, giving rise to possibly 10 different pension pots, according to Schroders Personal Wealth. This inevitably makes it difficult to keep track of your savings.
Rolling your pensions into one will not just mean less paperwork and make it easier to manage but it could reduce the fees - which over the long-term can really make a difference to your savings. You may be unaware of high charges that are eating into the growth of your pot.
Be aware that combining pension schemes is not always the right thing to do. Some pension schemes charge exit penalties or require you to take paid financial advice before leaving. Ask your pension providers what their fees are, the investment range, the retirement options and whether there are any valuable benefits such as a guaranteed annuity rate. Once you’ve got this information, you can make an informed decision about which (if any) pension pots you should close, and the best one to roll the pots into.
4. Track down lost pensions
Shockingly, an estimated £19.4bn remains unclaimed in lost pensions, according to the Association of British Insurers.
If you have lost track of a pension you had with an old employer you can use the government’s free Pension Tracing Service, which has a register of all workplace pensions.
The service will give you the name and contact details of the provider so you can contact them directly.
5. Prioritise paying in during maternity leave
If you stop paying into your workplace pension during maternity leave, your employer can stop too. So, if you can afford it, try and pay in during this time to avoid missing out on free money from your employer. You’ll be paying less because you only pay a percentage of your maternity pay while your employer has to continue contributing at their usual level.
6. Use a windfall wisely
You can pay a lump sum into your pension alongside regular contributions. If you are lucky enough to have a windfall consider paying at least some of it into your pension. Any extra amount should benefit from tax relief too (up to a certain limit) so you can see it as a double windfall. The sooner you invest your lump sum, the more time it will have to grow.
7. Carry forward your unused annual allowance
You receive tax relief on your pension contributions up to a maximum of £40,000 a year or 100% of your earnings, whichever is lower. This is called the annual allowance.
Any unused part of this annual allowance from the past three years can be carried forward - very useful if you benefit from a windfall or substantial pay rise.
8. Delay taking your state pension
To increase your retirement pot, you can delay your state pension payments for a slightly higher amount. This is because you don’t have to start taking the state pension as soon as you reach the qualifying age. This may be a good option if you are still working or have another source of income, and don’t need your state pension immediately.
If you reached state pension age before April 6, 2016:
For every five weeks you defer you’ll get a pension increase of 1%, which works out at 10.4% for a full year. So, deferring the basic state pension of £134.25 a week (or £6,981 a year) for a year means you’ll get £148.21 a week (or £7,707 a year). That’s £726 more a year - the cost of a nice holiday, or some home improvements.
If you reach state pension age after April 6, 2016:
For every nine weeks you defer you’ll get a 1% uplift, which works out as just under 5.8% per year.
Deferring the new state pension of £179.60 a week (or £9,339.20 a year) for a year means you’ll get £190.02 a week (or £9,881.04 a year). That’s £541.84 more a year - enough to pay for National Trust annual membership, some trips to the theatre, and a fancy meal out.
9. Take advantage of state benefits
As you get closer to retirement, you become eligible for discounts on public transport, free NHS prescriptions and eye tests. In England and Wales, you’ll be eligible for a free bus pass at state pension age. In Scotland and Northern Ireland, you can claim a free bus pass from the age of 60. Those who live in London can travel on buses, tubes and some National Rail services for free from age 60 with a 60+ Oyster photocard. Everyone aged over 60 can claim free eye check-ups and vouchers to help cover the cost of contact lenses and glasses.
Pension Credit is a benefit for those over state pension age and on a low income. It tops up your weekly income to £177.10 if you’re single, or to £270.30 if you have a partner. If you receive Pension Credit - even if it’s only a small amount - you may also be eligible for other benefits such as a free TV licence, a council tax reduction, cold weather payments and housing benefit (if you rent).
10. Consider equity release (as a last resort)
If you still need to boost your retirement savings, another way to raise money is via equity release. This allows those aged 55 and over to access the cash tied up in their home tax-free, without having to sell or move.
The most popular type of equity release is the lifetime mortgage. You don’t have to make monthly payments like a normal mortgage because the interest, which is fixed or capped, is ‘rolled up’. The loan plus the interest accrued is only payable once you move into long-term care or die. The ‘no negative equity guarantee’ means you will never owe more than what the house is sold for.
According to the Equity Release Council, homeowners accessed £1.17bn of property wealth in the second quarter of this year. Andrew Morris, senior equity release advisor at Age Partnership, says: “We are definitely finding more people looking to [boost their] income in retirement. Usually, it is people looking to release money to bridge a shortfall for a certain period of time, for example, between finishing work and the state pension starting.”
Equity release options are currently high - and rates are low. Data from Moneyfacts shows there are 698 lifetime mortgages on the market, with both More2Life and Pure Retirement offering rates of 2.53%.
You need to consider this option carefully, however. While interest rates may seem low, if you’re not making monthly repayments to reduce the debt, the interest compounds quickly. As a rough guide, the amount owed doubles every 14 years.
The money you release could also affect any state benefits you receive such as Pension Credit, and if you reinvest the money there could be tax on any growth or interest.
Always consider downsizing first, as it’s often cheaper and less risky than equity release. It’ll allow you to free up cash and move into a more appropriate home to spend your golden years.
Katie is staff writer at The Money Edit. She was the former staff writer at The Times and The Sunday Times. Her experience includes writing about personal finance, culture, travel and interviews celebrities. Her investigative work on financial abuse resulted in a number of mortgage prisoners being set free - and a nomination for the Best Personal Finance Story of the Year in the Headlinemoney awards 2021.
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