Many people will have started off 2022 with lofty financial resolutions, and these likely include ensuring their pensions are on track for a comfortable retirement.
According to Interactive Investor, “trying to get to grips with pensions for yourself can feel like learning a language without a teacher.”
Becky O’Connor, head of pensions and savings at the firm, said: “There’s a lot about pensions that no one tells you. You then end up finding out too late or even not at all. It’s hard to know what you don’t know, but with a little more understanding you might end up with a lot more in retirement.”
Interactive Investor has picked out pension tips – some are more relevant to workplace pension holders, while some focus on investment choices. Others are about making sure you make the most of tax relief.
1. Those who have received a bonus or inheritance can use ‘carry forward’ to contribute more than their annual allowance to a pension in a year, up to the amount of any unused allowance from the previous three years.
The annual pension allowance is £40,000 ($55,000) or up to your annual earnings, whichever is lower.
2. Check if you are getting the most out of your workplace offer. Some employers will match or even double-match your contributions beyond the 8% auto-enrolment minimum. It’s a good idea, if you can manage the extra and it is on offer, to effectively double up on what you put into your pension through employer matching up to the maximum - it’s free money from your employer that will be waiting for you when you retire.
If you don’t earn enough to be auto-enrolled (£10,000 is the threshold earnings for auto-enrolment), you can still opt-in voluntarily to a pension scheme. Contact your HR department.
3. You can ask your employer to pay into your Self-Invested Personal Pensions (Sipp) instead of your workplace scheme. Some employers will pay workplace pension contributions into a personal pension of their employee’s choice.
4. If you have a Sipp, consider setting up regular investing. This way, your contribution will be automatically split between a range of investments designated by you and in the proportions you choose, so you don’t have to go in and manually choose your investment allocation every time you make a contribution. Setting up regular investing can help minimise the risk that your contribution is sitting in cash for longer than necessary and is being put to work in the market.
5. Don’t forget to claim higher or additional rate relief via your tax return if paying into a personal pension. Basic rate tax relief is added automatically for you, but you’ll have to claim the rest back yourself via your self-assessment tax return.
6. If you are approaching the next tax bracket and make pension contributions via salary sacrifice, upping your pension contribution can mean you don’t end up paying the extra income tax.
This tip could come in handy with tax thresholds frozen but wages rising, dragging more people over the thresholds.
Watch: When should I start paying into a pension?
7. For those starting drawdown this year, there is a way to avoid being put on a scary emergency tax code and paying an unnecessarily large amount of tax on your first bit of income: take a small initial sum when you start accessing your pension of, say, £100, to avoid a tax bill on the whole amount you want to take out.
Your second withdrawal can then be for the amount of income you require and this should be taxed at the correct rate.
If you do end up paying emergency tax, call HMRC as soon as you can to get a refund.
8. Inflation is running extraordinarily high at the moment at 5.1%, so there’s a chance that returns on your pension are not beating inflation right now. If it consistently fails to beat inflation, that might be a sign that your risk level needs a review and you may need a higher proportion of equities in your portfolio to get back on top of price rises.
9. Interactive investor research suggests many young people are choosing low risk funds. But these are unlikely to grow as much and may not even beat inflation. Check what risk strategy your current pension is following and if you are ten years or so from retirement and it is low risk, consider choosing the medium or even higher growth strategies instead.
10. Even if you are an older pension investor approaching or in retirement, it’s possible your risk level is too low. The old guidance to de-risk and move into cash as you approach retirement no longer universally applies. Older investors should also re-evaluate their risk levels and check they haven’t de-risked too soon.
11. With inflation running high and interest rates remaining low despite the recent small rise to 0.25%, make sure you don’t have more than you need in cash savings. If you don’t need some of the money you have in savings for emergencies or for several years down the line, a more productive home for that money is likely to be a pension or an ISA.
If you’re already drawing an income from your pension, you can continue to pay in, as long as your contributions don’t exceed the Money Purchase Annual Allowance (MPAA) of £4,000, which is the limit for those who have already started taking an income.
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12. Check whether your current pension fund is sustainable and if it isn’t and you would like it to be, check whether there is a sustainable option on offer. If there isn’t, feel free to write to your pension provider to register your demand for one and in the meantime, you can create your own sustainable pension portfolio with a Sipp.
13. Pay into Sipps for kids and even grandkids. The Bank of Mum and Dad is surprisingly versatile and can fund pensions as well as property.
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If they aren’t earning yet, the contributions will receive basic rate tax relief and up to £3,600 a year can be paid in. But if your adult children happen to be higher rate taxpayers and you are a basic rate taxpayer, the contribution will receive tax relief at their marginal tax rate rather than yours, so your money is going further.
14. Use a pension calculator to see if you are on track to retire with the income you want.
15. Could you retire early? This aspirational goal could possibly be within your reach. If it is, consider ploughing some of your retirement money into ISAs, too. ISAs are the secret to early retirement, because you can access these before your Normal Minimum Pension Age (NMPA) and income from them is tax-free. There’s a £20,000 a year ISA allowance.
16. Talk to your partner about their pension. An open dialogue between couples can make managing retirement finances much easier.
17. Many people on fixed incomes will struggle with rising living costs this year. If you are drawing an income from your pension and are considering withdrawing more than usual to cope with rising living costs, check whether your new withdrawal rate is sustainable and if not, consider reverting back to a lower amount if and when costs ease up a bit.
Read more: The best place to retire in the UK
18. Want financial advice but balk at the cost? There is an option to take tax-free payments out of your pension to cover the cost of advice through ‘pension advice allowance’. The tax-free amount is up to £500 a session, it’s available at any age and you can use it three times in your lifetime but only once per tax year.
19. If you are approaching the age at which you can access your pension and are confused by the complicated array of options available to you, book an appointment with Pension Wise.
20. If you are on a low income in retirement, check whether you are entitled to Pension Credit. If you are, your income could be topped up to a more liveable amount. You can be in receipt of some state pension and even have some savings and still be entitled to Pension
21. Fill out your Expression of Wishes form so your pension goes to the right people or charities when you die. Also remember to update Expression of Wishes forms for old pensions. This is important because your pension is not part of your estate and so isn’t technically covered by what is in your will.
22. Check your state pension entitlement based on your current national insurance contributions to see if you are on track for a full state pension.
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