Whether you’ve just started saving into a pension, already retired or anywhere in between, it’s always a good idea to give your finances a health check.
Your retirement finances may be the focus of conversations with family or advisers at the moment. With longer life expectancies and people working past the traditional retirement age, it’s normal to have some concerns about funding your later years.
The good news is that it’s never too early or too late to start planning for your future and organising your retirement savings. However, the earlier you start saving, the better, and it can give you more options. Here are 10 ways to take control of your pension plans and strengthen your finances.
1. Define your numbers
How much income would you like to receive when you retire? Working out how much you’ll need to have saved before you stop working is a good place to start. The Office for National Statistics features a life expectancy calculator to give you an idea of how many years your pension savings will need to generate an income.
The Pensions and Lifetime Savings Association has worked out how much on average a couple or single person will need to support their retirement each year, whether their living standards are minimum, moderate or comfortable. Don’t forget that these figures can rise due to inflation.
2. Make the most of your workplace pension
In a workplace pension, the overall minimum total contribution is 8%, with employees paying 5% of their salary and employers contributing 3%. With the launch of pension auto-enrolment in 2012, it’s never been easier to get started.
However, there are ways you can boost your workplace pension, such as by increasing your contributions every month. Some employers also offer to match any additional contributions you make, up to a set level. This means your contributions will benefit from more tax relief and your overall pot will have more time to grow.
3. Take advantage of tax relief
If you’re a basic rate taxpayer, every contribution you make to your workplace or personal pension benefits from 20% tax relief. This means every pound in your pension only costs you 80 pence in contributions. The limit on how much you can contribute each year while benefiting from this tax relief is £60,000 (the annual allowance for the 2023/24 tax year), but is subject to tapering if you’re a very high earner (the tapered annual allowance).
Tax relief is linked to the highest band of income tax you pay. So if you’re a higher-rate or an additional-rate taxpayer you could claim up to 40% or 45% tax relief respectively. For example, a £10,000 pension payment could cost you just £6,000 if you’re a higher-rate taxpayer
4. Find any lost pensions
It’s easy to forget about pensions if you’ve had several jobs, but there are tools to help track them down. You can use the government website to help find pension contact details you might have missed or contact the Pensions Tracing Service.
All pension providers are obliged to send members of their schemes annual statements to keep them updated on how much their pension is worth, as well as how much income it could provide. It’s also important to contact your providers to let them know if your address has changed.
5. Consolidate pensions
Pension consolidation is the process of combining two or more pensions into one larger pot. People often consolidate in order to organise their assets, cut down and simplify the paperwork and potentially save money on management and administration fees.
Because it’s a larger pot, consolidation can offer an easier way to grow a pension as you’re able to manage your savings all in one place. Consolidation is best approached with the help of an expert, as some fees may apply and some pensions may be better left alone depending on whether they are a defined benefit or a defined contribution scheme.
6. Top up your state pension
You can track your State Pension by checking your National Insurance contribution record online to see if you qualify to receive the full amount when you retire. You’ll need to have had a total of 35 years of national insurance contributions to qualify for the full State Pension and a minimum of 10 years to qualify for any State Pension.
There are also options to make some voluntary contributions if you’ve fallen short – to help fill any gaps in your contributions. It’s also worth noting that if you defer or delay your State Pension, it will go up by 1% every nine weeks.
7. Take out a lump sum
You may have the option to take out 25% of your pension as a tax-free lump sum, or a pension commencement lump sum (PCLS) from age 55 (57 from 2028) up to a maximum limit. The rest of your pot will remain invested, giving you the flexibility as to how much income you would like, as and when you need it.
Taking smaller amounts after your initial lump sum minimises the income tax you would pay each year too. In addition, if your investments do well your pension fund could carry on growing – meaning your retirement income will also increase. Drawing a lump sum could impact your plans in later years, so it’s important to know you have the funds to sustain your lifestyle once you’ve stopped working.
8. Come out of retirement
If you’ve already started drawing an income from your pension but change your mind and want to continue working, you can carry on contributing, subject to the Money Purchase Annual Allowance limit. For the 2023/24 tax year, if you’ve started drawdown and are continuing to pay into your pension, you will only receive tax relief on £10,000 pension contributions annually.
9. Pass on your pension
Did you know your family can inherit any remaining money in your pension pot that you haven’t yet spent or converted to an annuity? This could offer a tax-efficient way to pass on your wealth and could potentially reduce the inheritance tax liability for your beneficiaries.
Tax treatment depends on your individual circumstances and may be subject to change in the future.
Any unspent money in your pension pot can be left to one or more people of your choice. This applies to most workplace pensions and personal pensions, but may not apply if you have an annuity so it’s worth getting advice from an expert before you make any decisions.
10. Explore other ways to save
Away from your pension, there are other ways to save for your retirement. For instance, consider using your annual £20,000 ISA allowance if you’ve reached your maximum allowance on pension contributions. Although there is no tax relief when you put money into your ISA, any interest or gains you make are free of tax, and some ISAs offer easy access to your money when you want.
Remember the value of investments can go down as well as up and you may get back less than you invest.
Whether you’re looking to make the most of your pension or want more information on other ways to save for retirement, speaking to a Specialist Financial Adviser from Wesleyan Financial Services can help you make the best decisions for your circumstances.