Do you think you’ll have enough money to live on in retirement? Do you have a pension pot, and will it be big enough to support you in your post-working life?
The answer is you’re most likely not putting enough away to have a comfortable retirement.
Your pension is your income for when you stop working, yet millions of us simply do not save enough.
The average person will have a shortfall of £115,768 in their retirement if they only put in the minimum amount of contributions into their pensions, according to analysis by pension advisers Almond Financial. Its Retirement Shortfall Report is based on a moderate retirement living standard of £23,300 a year for those living outside of London.
Those living in the capital are likely to struggle the most, with the average Londoner facing a staggering shortfall of more than £177,000.
The average UK pension pot stands at £61,897, according to the Financial Conduct Authority. If you purchased an annuity, this amount would provide an annual income of £3,000 from age 67. If you add that to the state pension (worth £10,600 a year if you qualify for the full payout), you’ll have about £13,600 a year for retirement.
If you think about how much you earn now, and all the things you’d like to do when you finish work, that doesn’t sound like much. (In fact, it’s not even enough to secure a “moderate” retirement - more on that in a second.)
How much do I need to save for a comfortable retirement?
A 2022 report by Loughborough University and the Pensions and Lifetime Savings Association (PLSA) showed what the average retiree would need in annual retirement income to live a “minimum”, “moderate” and “comfortable” life after retiring.
- Minimum (£12,800) – This covers all essentials with some discretionary spending left over.
- Moderate (£23,300/London: £28,300) – This gives more financial stability and security with more discretionary spending.
- Comfortable (£37,300/London: £40,900) – This provides a much more comfortable retirement with more flexibility and some luxuries.
Most people will need to save more than just the minimum amount as prescribed by the government’s auto-enrolment initiative. This means employees should look at increasing their contributions. If you’re self-employed, chances are you don’t even have a pension, but it’s not too late to start saving.
The good news is that whatever your retirement dreams - 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 to increase your nest egg, sometimes with minimal effort.
Here are 10 ways to enhance your pension savings.
1. Use your pay-rise to boost your pension savings
A clever way 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 the wealth manager Hargreaves Lansdown.
This is based on a 30-year-old, and assumes investment growth of 5% each year.
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.
Read how Naomi consolidated her six pensions and now pays into one scheme in order to have £300,000 by the age of 65.
4. Track down lost pensions
Shockingly, an estimated £26.6bn 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 also stop contributing to your pension. So, if you can afford it, you could try and pay in during this time to avoid missing out on free money from your employer. One of the best things about doing this is you’ll be paying less because you only pay a percentage of your maternity pay while your employer must continue contributing at their usual level.
Women have substantially less pension savings than men, with one study by Trades Union Congress showing them to be worth less than a fifth because of unequal division of caring responsibilities and having to work part-time to look after children.
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. Use your annual allowance
From 6 April 2023, you will receive tax relief on your pension contributions up to a maximum of £60,000 a year. This is called the annual allowance, which was increased by chancellor Jeremy Hunt in his recent Spring Budget from £40,000 a year.
If you have not used part of your annual allowance from the past three years, this can be carried forward which is very useful if you benefit from a windfall or substantial pay rise.
The Money Purchase Annual Allowance (MPAA) has also risen from £4,000 to £10,000. This limits what you can put into your pension once you start to take an income from it from the age of 55.
This will help if you needed to dip into your pension before retiring and still need to build up your pot before you completely give up work.
8. Delay taking your state pension
To increase your retirement pot, you can delay your state pension payments in exchange 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.
The amount of extra state pension you could get by deferring depends on when you reach state pension age.
If you reach state pension age on or after 6 April 2016:
Your state pension increases by the equivalent of 1% for every nine weeks you defer. This works out as just under 5.8% for every 52 weeks.
The extra amount is paid with your regular state pension payment.
The full rate of the new state pension has risen from £185.15 a week to £203.85, equating to £10,600.20 a year.
If you receive the full new state pension of £203.85 a week, by deferring for 52 weeks, you’ll get an extra £11.82 a week. If there is a future annual increase in the state pension, you could get an even larger amount.
Deferring for a year will see you increase your annual state pension to £215.70 a week, or £11,216.40 a year.
That means you’ll get another £616.20 a year – which could fund a mini break, or a few trips to the theatre.
If you reached state pension age before 6 April 2016:
Your state pension increases by the equivalent of 1% for every five weeks you defer, which works out to be a 10.4% increase for every 52 weeks.
The new full basic state pension under the old system is now £156.20 a week in 2023/24.
If you defer for a year, your full basic state pension will rise to £172.45 a week, giving you an extra £16.25 a week.
It would give you £8,967.40 a year which means an extra £845 per year - the cost of a holiday or some home improvements.
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 the 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 £182.60 if you’re single, or to £278.70 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).
Also read about the new pensions tax relief top-up to benefit low earners.
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, last year 93,421 customers took out new plans, made use of drawdown facilities or agreed extensions to existing plans, a year-on-year rise of 23% compared to 2021. The UK equity release market has doubled in size over the past five years, reaching £6.2bn in 2022, which was a new annual record.
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.”
You need to consider this option carefully, however, because rates are currently very high. 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.
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