Whether you are on the brink of retirement or have years to go, there are things you can do now to generate a larger post-work income.
Increasing the sum you pay into your pension each month is the most straightforward way to boost your fund – and can be especially lucrative if your employer is willing to match some of your extra contributions.
Becky O’Connor, the head of pensions and savings at Interactive Investor, gives the example of someone who starts work on £25,000, enjoys salary growth of about 1% a year and investment growth of roughly 2.5% a year, and has 8% paid in each year. They could have a pot size of £179,217 when they retire at 67. If they increase their monthly contribution at the start from £168 to £189, their fund will be £22,000 bigger when they retire.
A good time to do this is if you get a pay rise or when a regular expense – for example, repaying a loan – comes to an end. You are not used to having that money at your disposal, so instead of giving yourself the opportunity to spend it, redirect the sum into your pension.
The great thing about pension contributions is that they are boosted by tax relief, so whatever you pay in will be worth more in your retirement fund than it would be in your pocket. For a basic-rate taxpayer, adding £1 to your pension will cost you 80p, while for a higher-rate taxpayer it will cost only 60p.
If you have had several jobs and they have come with different pensions, it may be worth combining your funds – but only those that are defined contribution schemes. Defined benefit – also known as final salary – schemes are often more valuable to you left where they are than they would be if they were moved, O’Connor says.
Bringing together several small pensions makes it easier to keep track of them. You may also be able to cut the fees you pay at the same time.
People reaching pension age after April 2016 who are not on track for the full state payment can make top-ups relatively cheaply, says Steve Webb, a partner at the pension consultants LCP.
Filling a recent gap in your national insurance record costs a one-off lump sum of £800, he says, but will usually add more than £250 to your state pension every year. “Because voluntary contributions are subsidised by the government, you get your money back relatively quickly, and after about four years (allowing for tax) you are usually in profit,” he says. “The main groups who should be wary are people in poor health (who may not draw their pension for long) or those on means-tested benefits, whose benefits would be reduced if their state pension went up.”
You can find out what you are on track to receive by requesting a pension forecast – this can be done online or by phone on 0800 731 0175. The forecast will also tell you if, and how, you can increase the figure.
You can also increase the weekly payment by delaying when you claim the benefit but this comes with a risk that you will get less overall. If you are already drawing your state pension, check you are getting the right sum – lots of women have been short-changed.
Defined contribution pension schemes – those where payments are not based on your salary – typically have default funds for your money to go into, and you may find your pot is quite cautiously invested. If you are young and have a long time still to work or you are older but know you do not plan to start drawing your pension until after the traditional retirement age, you may want to be in higher-risk funds than those you are automatically offered.
“In general, the more risk you are prepared to take, the higher return you can expect to get over the long run,” Webb says. “Though you need to be able to cope with the fact that there may be periods when your investment goes down as well as up.”
Fund factsheets from your provider should indicate how high risk an investment is considered. Take a look at what your pension provider offers and see if you want to spread some of your money to higher-risk funds – bear in mind that anything other than cash can go down in value. If your scheme provider offers advice, it is worth talking through your options. The government-backed website Moneyhelper.org.uk has information on things to consider when choosing pension investments.
Is your Isa gathering dust? Does the interest rate on your savings account come with more than one zero at the beginning? The money you are holding in there may work harder for you if you paid it into your pension – and it will get tax relief as soon as you do. If you are a basic-rate taxpayer, putting in a lump sum of £4,000 will result in £5,000 being added to your pot. “If you do receive a lump sum, sticking it in a pension can be the most lucrative thing you could do with it, thanks to tax relief and long-term investment growth,” O’Connor says. “The earlier you do it in working life, the bigger the impact.”
There are some caveats: money paid into a pension cannot be accessed until you reach age 55, and even then it will take time to arrange a withdrawal, so this is not the place to put your emergency savings. You also need to make sure that it will not push you over any contribution limits – the lifetime cap on the value of your pension is just over £1m, and separately anything you pay in above £40,000 a year will not get a tax benefit.
Managing your pension does not stop when you decide to cash it in – in fact, that is when the hard work starts. First, steer clear of anyone who calls or emails out of the blue to offer you an investment. Pensions scams have boomed since the then chancellor George Osborne made it easier for people to take their money out of their retirement fund. It is wise to discuss your options with an expert before making any decisions – you might be offered a session by your employer when you retire or need to source your own advice.
If you go for an annuity – a contract offering to pay you an income in exchange for your fund – you should shop around. “Even if you don’t take advice, an annuity supermarket or broker can help you get the best product,” Webb says.
He says those who want to take 25% of their fund as tax-free cash should think carefully about what happens to the rest, particularly if they don’t need it straight away. “Too many people take all 100% out and then dump the balance in a cash account paying close to zero interest,” he says. Instead, you could leave it invested in a drawdown account or similar until you need it.