To have all your basic needs covered in retirement, you’ll need to have enough money put aside. So, how do you get there? Well, if you’re living in the UK and earning over £166 a week, your employer should be making national insurance contributions out of your salary, and you should be able to claim a state pension after 10 years’ worth of contributions. However, relying solely on the state pension for your golden years may not be the best strategy. At £9,110 per year currently, the full state pension may not be enough to help you cover the minimum costs you’ll likely face when you retire1. If you’re working, you should be enrolled in a workplace pension where a portion of your earnings are put aside for your golden years. This will undeniably help boost your future retirement income. But with the ever-increasing cost of living, sticking to your state and workplace pensions may not do the trick and you could be in for a nasty shock as you approach retirement. So, make sure you consider other ways to give your pot a push. Here are some tips that could help you reach your retirement goals.
Consider opening a personal pension or SIPP (Self-Invested Personal Pension)
If you’re looking to boost your retirement income, paying into a personal pension could help. Personal pensions and SIPPs give you more control over your retirement pot. Not only can you make your own contributions, you could also invest in a large range of investments, such as shares, bonds, and property. The good thing about personal pensions and SIPPs is that you also get a little boost from the government. For each pension contribution you make, you’ll receive a 25% top-up. In other words, if you plan on investing £100 in your SIPP, you’ll only need to put in £80 and the government will top up your pot by adding the remaining £20. However, the annual amount you get tax relief on is currently limited to £40,000, or the totality of your earnings, whichever is lower – this pension allowance is the combined contributions made by you and the government. If your SIPP exceeds the limit, you may need to pay tax on the extra money. For instance, if you earn £50,000 and decide to put the entire amount in your personal pension, you’ll only get tax relief on £40,000.
SIPPs and personal pensions come with many other tax benefits. When you invest, you’ll typically need to pay tax on profits you make. With a SIPP, your potential returns will not be subject to tax, meaning you’ll get to keep more of your money. Again, this tax relief only applies to a limited amount – and currently, the allowance is set to £40,000 a year (or 100% of your earnings, provided they’re lower) – this includes contributions made by you and the government. Another tax benefit is that you’ll have the possibility to withdraw up to 25% of your pension money as a tax-free lump sum once you reach the age of 55.
Start paying into your pension early
A good way to boost your retirement income is to start planning for later life as soon as you can. If retirement is a long way, preparing for your golden years may not be a priority. After all, you may need to deal with other financial matters, and that’s absolutely fine. But there are many things you could start doing. For instance, you could check if you’re on top of your national insurance contributions. If you’ve had many jobs and contributed to different workplace pensions, it could be a good idea to locate them and look at how your money has been performing. Also, if you want to make the most of your golden years, it could be worth opening a SIPP. You don’t need to be super wealthy to take the plunge. It’s possible to save for your retirement with small amounts of money. The trick is to pay into your pension frequently. That way, since your money is locked in for a number of years, it could add up and benefit from the power of compounding. What do you mean by this, you ask? Well, typically when your money is invested in companies, you’re entitled to enjoy some of their profits. When these profits (also known as ‘dividends’) get reinvested in your plan, your money will automatically get a boost, and it could quickly add up and snowball over the years. For example, let’s say you’re 25 and plan on retiring when you turn 65. If you put £50 a month in your SIPP, you could potentially end up with £70,686 after 40 years2.
Think about consolidating your pensions to one place
If you’ve contributed to many pensions, including workplace pension schemes, it could be worth combining them all in one place. You may not realise it yet, but by having several pensions floating around, you could be paying a lot in fees and charges. Ultimately, these costs will be eating into your pot and this could make a significant different to how much you’ll get when you retire. Therefore, a good way to boost your future retirement income is to try and bring these costs down. And consolidating your pensions could help you do just that. By moving all your pensions to one place, you’ll only have one set of fees to pay. But make sure you shop around and compare the different costs charged by pension providers.
Transferring your pensions can sound like a big job, but it doesn’t need to be. With digital investing platforms, like Wealthify, consolidating your pensions is easy. All you need to do is choose how much you want to transfer and the risk level that suits you. You’ll also need to complete the official Pensions Transfer Form to make the move successful. Learn more about transferring your pensions to Wealthify.
Working out how much you need to save in order to retire can be tricky, but luckily, our pension calculator does all the hard work for you. In four simple steps, you can get a good idea of whether you’re on track or not. Try it today and see what you could get.
2: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be£ 43,905. If markets perform better, your return could be £121,496. Values correct as of 18/05/20.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.