How to top up your pension
Pension savers will soon see the estimated value of their pensions drop significantly after the Financial Services Authority forces them to "get real" by reducing projection rates for pensions.
From 6 April 2014, providers will have to give savers an indication of possible future returns based on their pension growing by 2, 5 and 8%, rather than 5, 7 and 9%, as is currently the case.
If you don't want to be disappointed by the size of your potential pension fund, what can you do to top it up?
* If you can afford to, 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.
* Review your attitude to risk.
While it's understandable to be careful with your money, "many customers underestimate the risk of potential low annual returns from investing in low-risk assets, which over the longer term are expected to underperform higher-risk assets," says Rod McKie, head of at retirement marketing at Aegon UK.
"This is particularly relevant for customers with many years to go to retirement as such a strategy will on average result in them having a pension pot significantly lower than someone who has taken more risk," he adds.
For example, Morningstar data shows that in the 10 years to 9 November 2012, the average fund in the relatively risky Global Emerging Equity sector increased by 375%, compared with a more modest rise of 70% from the average fund in the lower-risk Sterling Corporate Bond fund.
However, pensions campaigner and director-general of Saga Dr Ros Altmann warns: "If risky investments don't work out then you might need to be ready to put in much more later."
* Delay drawing your pension.
This gives you longer to contribute to your fund as well as allowing your investments more time to grow. Annuity rates also improve as you get older, so if you delay your retirement you stand to get a better pension income - as long as overall annuity rates don't fall.
Also, don't settle for the first annuity rate your pension company offers. Make sure you shop around for a competitive rate as the difference could be as much as 30% more income.
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).
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
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.