This Friday is Pension Awareness Day. The aim of the day is to promote the importance of saving for the future and to alert the nation that it is not saving enough for retirement. So, in support, here are my seven steps to building a bigger pension.
1. Start investing early
Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it.... he who doesn't pays it.” Starting earlier gives you a huge advantage; no matter how little you have to invest, it is still worth doing.
For example, if an investor invests £1 a day for 70 years and achieves an annual rate of return of 7%, with all income being reinvested and interest being compounded monthly, the resulting pot of money is worth £685,245. If the same investor wanted to make the same £685,245 over a 50-year period, under the same conditions, he would have had to invest more than £4 a day.
2. Don't opt out – make it a regular habit
Remember to actually save into your pension on a regular basis, especially if it means your employer will contribute more too. And remember to increase your contributions as your wages increase. It is all well and good picking funds that perform well, but the best way to make a pot grow is to add money to it. The amount you save depends entirely on what you can afford, but the more you save now, the more you will have in retirement.
3. Make regular checks
Monitoring your pension is hugely important, particularly when investing in funds. By monitoring where you are invested you can ensure that you are on track to meet your retirement goal. Overtime you may also want to change the look of your portfolio. Someone who has a long time until they retire may be willing to take more risk, as their funds will have longer to hopefully outperform, despite any short-term dips. Someone who is due to retire in the next five -10 years may want to be in less volatile funds, so that their savings have less chance of being damaged by any short-term dips in markets.
4. Consolidate – don't lose your pensions when you switch jobs
It is unlikely that you will have only one employer throughout your lifetime, however, so it could be tricky to keep track of the different policies you hold. Consolidating all your pensions in one place can make it a lot easier to keep an eye on charges, but also where your money is invested. Remember to check that you won't lose any guarantees or benefits by transferring, and always check if there are transfer out charges. The government offers a free pension tracing service.
5. Reclaim missed tax relief on contributions
All UK residents under 75 receive a minimum of 20% tax relief when they contribute to a pension. This is usually automatically reclaimed and added to your investment. For example, if you were to invest £800 into your pension, £200 would be added by the government, making your total contribution £1,000 for that tax year. However, if you are a higher rate or additional rate tax payer, you can claim the extra back through your tax return. Say you pay 40% tax, the extra 20% can be reclaimed, meaning that your £1,000 contribution is now costing you only £600.
Many people are missing out on these savings. If you are one of those people, don't worry! You can write to your local tax office up to four years after the year you contributed to reclaim the missed tax relief. You will usually receive a cheque, or have your next tax bill reduced.
6. You can keep paying into your pension after you retire
Just because you have retired does not mean you have to stop contributing to your pension completely. Up to the age of 75 you can continue to receive tax relief on contributions, depending on your circumstances.
7. Save for a family member
The annual allowance for an individual is based on how much they have earned in that tax year, but did you know that someone who is a non-earner can also save into a pension. The amount a person will receive as a state pension is entirely based on their national insurance contributions through their working life. But what about those individuals that have taken time out to raise a family?
If your spouse has done so, why not save into a personal pension for them, so they are not disadvantaged in retirement?
Darius McDermott is managing director at Chelsea Financial Services and FundCalibre