A guide to retirement and pensions

Are you ‘mid or late career’ or planning to retire within ten years? If the answer is ‘yes,’ then you probably want to know the answers to some of the following questions: Will I be able to retire when I want to? Will I run out of money? How can I have the kind of retirement I want? To help you with these questions, we’ve provided some ideas about how to boost your overall pension savings and potentially help achieve your retirement goals sooner.

3 min read

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 difference. However, as these contributions will be invested, you should consider market performance and understand that just by contributing more, there is no guarantee that you will increase your retirement fund.

For those lucky enough to receive a pay rise in line with inflation every year, increasing your pension contributions, even by just 1% could increase your eventual pension pot. The reason why a relatively small increase in pension contributions can result in an increase in the value of your pension pot is because of the power of compounding. Compounding is when you earn interest on both the money you’ve saved and the interest that money attracts.

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). However, you should be aware that this may not be appropriate in all circumstances, depending on your attitude to risk, particularly if you are close to retirement. It may be worth seeking financial advice from a certified Wealth Planner if you are considering this.

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. This is called your Annual Allowance (AA) and the limit is currently £60,000. Furthermore the annual allowance is tapered (reduced) for higher earners, and is reduced by £1 for every £2 someone earns over £260,000 (including pension contributions). Tapering stops when the annual allowance reaches £10,000.

If you want to contribute more than your AA 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 boost to your retirement savings.

You can trace old pensions by contacting 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 could 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 Freedoms reforms in 2015, there are now more options available than ever. 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.

You may decide to use pension drawdown, which provides a way to establish a flexible income, set at whatever level you choose, and which can be increased or decreased over time to match your needs. For some, this may be a more fitting solution to their retirement needs than purchasing an annuity, which 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 understand what your individual circumstances will mean in relation to pension drawdown 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 potential.

But it’s impossible to predict exactly how they will perform each year. Some years they will grow more than others, and some years they may fall in value which may result in the overall fund reducing 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.

Changing pensions landscape

In this world of ours, very little stands still. The same can be said for the pensions landscape, so it is vital to revisit and review your pension arrangements regularly to ensure they remain on track to deliver what you need.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.

Depending on how you access your pension, your annual allowance will be reduced to £10,000. This is known as the Money Purchase Allowance (MPAA).