Put some zing into your pension

Whether you have several decades of work ahead of you or you're preparing to hang up your boots, the New Year is the perfect time to give your pension pot a shot in the arm.

Most of us, aware that we're living longer and cannot rely on the state to provide for our retirement, know we need to pay more into our pension. But let's face it, there are more exciting ways to spend any spare cash.

However, the rewards for shaking off the lethargy and tackling your pension head-on are greater than ever before. Changes introduced to pension rules in April 2006 dramatically opened up the options available to you when it comes to getting the most out of your pension, regardless of your circumstances. So, here are a few simple steps that can make a big difference to the pension you retire with.

Top up your company scheme

If you have access to a good employer's scheme, make the most of it. A scheme will either be linked to your final salary or to contributions by you and your employer. The new pension rules mean you can pay in as much as 100% of your salary up to a maximum of £235,000 a year and get tax-relief on it.

Usually, your employer will contribute to the scheme, and most will match any contributions made by you, so it would be foolish not to take advantage of this. Your pension scheme booklet should explain how the pension plan works and what your entitlements are.

Receiving a bonus from your employer offers a good opportunity to give your pension a massive boost and save on tax. While it's tempting to take the bonus and spend it, or even put it into the pension yourself, you could maximise the bonus by using what's known as 'salary sacrifice'. Under a salary sacrifice arrangement, an employer will put your bonus into your pension, where it can amount to a much larger sum.

Under salary sacrifice, national insurance contributions, at 12.8%, are not deducted from the sum. So ask your employer if they would accept a bonus sacrifice arrangement, says Jason Witcombe from independent financial advisers, Evolve Financial Planning.

If you're lucky enough to have access to a final salary scheme, see if you can purchase additional years, as these schemes are gold-plated - unlike other pension plans, they provide a guaranteed benefit without the investment risk. Additional voluntary contributions (AVCs) can be used to buy extra years in final-salary pensions, so ask your employer if this is an option.

If you're a member of an occupational money purchase (or defined contribution) scheme, you can make AVCs alongside it to increase your pension, but there's no great benefit. AVCs were more valuable before April 2006, when there were restrictions on how much you could pay into a company and a personal pension at the same time.

While an employer's AVC will probably have lower charges than a personal pension, you may benefit from a wider investment choice and better performance by saving elsewhere, such as in a self-invested personal pension (SIPP).

Take out a stakeholder, personal pension or SIPP

If you're self-employed or not eligible to join your employer's scheme, stakeholders, personal pensions and SIPPs are the most obvious way to improve your pension position. If you are not earning, perhaps because you have taken a career break, you can still pay into a personal pension, but your contributions are limited to £3,600 a year, after tax relief.

Which type of personal pension you choose depends on how much you have to invest, your attitude to risk and the extent to which you want to take investment resp­onsibility for your retirement fund. Stakeholder plans are the most basic form of personal pension and are designed for people seeking a no-fuss retirement savings vehicle.

"Stakeholders are simple, with a minimum contribution of just £20 a month and a simple charging structure," explains Tom McPhail, head of pensions research at IFA Hargreaves Lansdown. "Also, there are usually no more than 20 funds on offer, so if you want an easy option that requires minimum input, this might be the right solution."

Alternatively, using a personal pension will give access to a wider range of investment opportunities. Many personal pension providers have brought their plans in line with the stakeholder model, capping charges at 1.5% a year for the first 10 years and 1% thereafter. But be aware that there is still no limit on personal pension charges outside a stakeholder, so check what these are before you apply.

For some, typically those with a decent-sized pension pot to invest, SIPPs can be attractive. "SIPPs come at a higher cost," says Philip Pearson of Southampton-based IFA P&P Invest, "but there are more investment options, which include commercial property and individual shares."

Dealing charges and management fees can vary dramatically between providers and can be hefty, making SIPPs better suited to high-net-worth individuals. As well as set-up charges of between £400 and £500 - and similar annual charges - you face initial and annual charges for each investment.

These charges can make a big difference to your investment over the long term, so it's only really worth it with a pension pot of at least £50,000, and preferably around £100,000 or more.

McPhail says: "If you are really interested in what happens to your pension, you should look more widely and consider SIPPs. You can often monitor your pension online, so these promote investor engagement."

Set up other investments

Of course, pensions aren't the only way to save for your retirement. You can top up your retirement income using an array of other investments. You can, for example, save the maximum amount each year into individual savings accounts (ISA), shares and bonds, or invest in property. "It is important not to put all your eggs in one basket," says Pearson. "This is especially true when planning a lifetime of saving towards retirement."

Tax-efficient investments running alongside pensions include ISAs (both stocks and shares and cash), Government-backed National Savings & Investments products and venture capital trusts (VCTs), which are at the top end of the risk scale. Similarly, some investment bonds can have tax benefits, depending on your tax status.

For most people, building up money in an ISA as well as their pension makes the most sense, given the tax-free status enjoyed by ISAs. You can put up to £3,600 a year into a cash ISA or £7,200 into an equity ISA, either invested entirely in the stockmarket or split between cash and equity funds.


Saving into a company or personal pension is advantageous, as your contributions benefit from tax relief, but you cannot access the money until you retire, as you can with some other investments. Also, while the tax benefits make paying into a pension a smart idea, regardless of your circumstances, you might want to think twice about paying in more than you need to if you have a mortgage to pay or debts to clear, or if you're not using your full ISA allowance.

But don't put off the decision to save for retirement indefinitely, as it only means you'll have to put away more money further down the line. The earlier you start paying into a pension, the longer it has to grow - giving you the chance to enjoy a long and comfortable retirement.

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