10 ways to boost your pension
To help you get going, we asked leading investment professionals from all around the country for their top pension tips – quick and easy wins that have the potential to transform your savings.
1. Stop procrastinating
The earlier you start saving, the greater the impact will be, points out Tom McPhail, head of pensions research at Hargreaves Lansdown. "Someone earning £25,000 a year at age 25 who starts a pension with an 8% contribution can look forward to a retirement income of around £7,500 a year at 65," he says. "Delay five years and the figure drops to around £5,300."
It's easy to put pension savings off because you don't feel you can save meaningful sums right now. But every penny helps and behavioural economics tells us people who start saving, even if they only put small sums by, are more likely to save more later on when their finances allow.
"If you can just get started and then ratchet up your contributions every year, over time you can get to where you need to be," says McPhail.
Jason Butler, investment manager at Bloomsbury True Wealth, adds: "Always direct part of any pay rise into long-term savings. What you've never had you don't miss."
2. Don't turn down free money
All employers must offer their staff a company pension scheme under the auto-enrolment system, which is currently being phased in - large and medium-sized employers are already covered by the new regime and smaller employers soon will be. Since the rules also require employers to make a contribution on your behalf, exercising your right to opt out of the scheme is effectively giving up additional pay.
Always join a company pension scheme if you can, says Butler. "Pay in as much as you can to obtain any additional matching employer contributions," he adds. "It's free money."
3. Set up salary sacrifice
Salary sacrifice schemes, where your employer deducts your pension contributions from your pre-tax salary, are particularly tax efficient. Your employer pays the amount you are sacrificing from your gross salary into your pension, saving you income tax on the amount sacrificed and the lower salary amount.
Allan Maxwell, a director at Corporate Benefits Consulting, is a huge fan. "An employee who is making a monthly pension contribution of £100 after tax relief could give up £117.65 of salary each month, which would leave them with the same take home pay," he says. "The £16.23 monthly National Insurance saving could be added to the pension contribution, resulting in a total contribution of £133.88 a month – at no extra cost to the employee or employer."
This is not only an option for employees, points out David Crozier, a director of Navigator Financial Planning. "Business owners should be doing this, too," he says.
4. Be a smarter investor
How much you pay into your pension fund is just one of the factors that determines your eventual income in retirement. Financial advisers warn pension savers are often far too conservative given the long-term nature of saving for old age.
"When you are younger and have a long period until your retirement date you can afford to take more risk with your investments, especially if you're investing monthly," says Patrick Connolly, a certified financial planner at Chase de Vere. "Investing in equities is likely to give you the best long-term returns, although as you get closer to retirement you should hold more money in other assets such as cash, fixed interest and property, as capital protection should become as important as capital growth."
Don't stick to the UK stockmarket, adds Butler – aim for a diversified portfolio of assets. "Invest a meaningful amount of your pension into a diversified global equity index fund because over 20 years or more, that is likely to provide the highest post-inflation return."
Don't forget the impact of fees. "Use low-cost index funds for investment exposure because every penny saved is more return for you," adds Butler.
5. Don't just save in a pension
"For most people, the best approach for long-term savings is a combination of pensions and Isas," says Connolly. "Pensions provide initial tax relief, which gives your savings an immediate uplift but they are inflexible, whereas Isas can still be tax-efficient and you are able to access your money whenever you like."
Once you've used up your Isa allowance, consider other tax-efficient savings schemes, suggests Danny Cox, head of financial planning at Hargreaves Lansdown.
"Venture capital trusts (VCTs) are becoming more popular as tax-free savings once pension and Isa allowances are all used up," he says.
"VCTs are a higher risk investment suitable for sophisticated investors and provide up to 30% tax relief on contributions – a £10,000 investment therefore costs as little as £7,000."
Nor are tax-efficient schemes the only option, adds Butler. He argues: "Pension provision could also include all or any of the following – debt repayment, buying or enhancing your home with the intention of downsizing in later life, property development or building a business to sell."
6. Ditch under performing investment funds
"Poor performance from investment funds is one of the main reasons why people are dissatisfied with their pensions," warns Kusal Ariyawansa, a chartered and certified financial planner at Appleton Gerrard. "Keep a close eye on your pension fund and if it is failing to meet the annual growth rates you need in order to hit your savings targets, ask your adviser why."
That's not to say you should dump all such investments automatically – but don't be afraid to switch out of funds that aren't keeping pace with market benchmarks or their peers.
7. Retire later
Annuity providers offer rates based on how long they expect you to live in retirement, so retiring later should net you a better deal. Our 25-year-old saver on target for £7,500 a year at age 65 could delay retirement for five years and see his income figure jump to £10,300, adds Tom McPhail.
The same applies to pensions from the state. Wait longer to claim your state pension benefits and you're entitled to enhanced rates. Even a year's delay entitles you to 10% more.
8. Increase your contributions
Adding just a bit to the amount you put away each month can really mount up. For example, assuming a real return of 3.5% per year (after charges and inflation), a 30-year-old paying an extra £50 a month net into their pension until the state pension age of 68 would boost their pension pot by about £57,000 in today's money, according to Standard Life.
9. Get a state pension forecast
State pension benefits may not be sufficient to deliver the standard of living you hope for in retirement, but they're a good start. "Find out what state pension entitlement you have already by requesting a forecast from the Department for Work and Pensions," advises Butler. "If you have a gap, consider making class 3 voluntary National Insurance contributions because this means the government takes on the risk of inflation and you living too long."
10. Get expert help
Ask a bunch of independent financial advisers for pension planning tips and you can guarantee they'll recommend taking independent financial advice. But they've got a point – a good adviser can help you make the best of your savings.
"By working with a financial planner to put together a proper retirement plan, you will know how much pension contribution you need to make in order to hit your required goals," says Simon Webster, managing director of Facts & Figures Chartered Financial Planning.
"Engage with an IFA as early as possible rather than leaving it until you are due to take benefits from your plan," adds Robert Taylor, a chartered financial planner at VouchedFor. "Review your pension plans on a regular basis and if you have existing pensions in place get an independent review of them as soon as possible."
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.