Making the most of your pensions
It’s essential that you review your pension situation regularly. If you find you have a shortfall, the need for action is clear. If your retirement savings are broadly on track, you can still take steps to make it more certain that your pension pot will be able to achieve the income you want when you retire.
Take stock of your pension performance
If you haven’t yet reviewed your pension savings against a retirement income goal, we have a handy worksheet to help you do this – use the link below. The rest of this page offers tips to boost your potential pension income if you’ve found that your pension savings are on track.
Ways to make your pension savings deliver more
There’s a range of things you can do to boost the performance of your pensions. Here are some key options to consider.
Increase your savings
The most obvious way to boost your pension provision is to save more if you can. If you have spare income, then putting it into a pension is one of the most tax-efficient ways of investing it.
Any additional income you save into a pension will be topped up by the taxman. And if you have access to a workplace scheme that your employer contributes to, then depending on the scheme rules, if you boost your contributions your employer may boost theirs too.
Make sure you claim all your tax relief
If you are a higher rate taxpayer making pension contributions to a workplace or personal pension, you will automatically receive basic rate tax relief on the contribution. However any higher rate tax will need to be claimed on your self-assessment tax return.
If you don’t fill in a tax return, contact HMRC. This additional tax relief may allow you to benefit from even bigger pension contributions.
Review the way your pension pot is invested
If you have a defined contribution personal or workplace pension, then you get to choose the way your pension pot is invested.
Typically this involves choosing from a range of funds offered by your pension provider. These funds will be weighted differently between various types of assets, which offer different levels of risk and potential return.
As a general rule of thumb you can afford to take more risk when you’re young and less as you get older – the longer your money will be invested for, the more scope you’ll have to take any ups and downs in asset performance in your stride.
So if you’re under 50 and your pension savings are invested conservatively, you may want to consider moving at least some of your fund into potentially higher-growth assets such as stocks and shares. But bear in mind that there is no guarantee that higher growth will be achieved.
Transferring a personal pension into a SIPP (self-invested personal pension) lets you access a wider range of investment options, but this brings increased risks if you’re not an experienced investor and may expose you to higher charges.
Unless you understand how the different pension investments work it’s probably a good idea to get financial advice before making any changes to your pension investment.
Find out more about different pension fund investment options in our guides below:
If you have a workplace defined-benefit pension then you don’t need to decide how your fund is invested – it’s up to your employer to generate the investment returns to pay for the pension income you’re entitled to.
Review the charges deducted from your savings
An annual management charge of 1.5% a year could have eaten away a quarter of your pension fund after 35 years. An annual charge of 0.5% would have reduced your fund by only one-tenth over the same period.
You don’t need to worry about this if you are in a defined benefit scheme But if you are in any sort of defined contribution scheme, charges reduce the value of your pension pot.
You may be paying different types of charges.
- Charges for administering the pension scheme. This is most likely to apply if you have opted for a SIPP. If you are paying these charges make sure that you really do want and use the extra features that the SIPP offers.
- Charges for each of the investment funds within your scheme. The most obvious charges are an upfront charge deducted when you first start to invest (ranging from nothing up to about 6%) and an on-going annual management charge (between say 0.3% and 2% a year). Check what you are paying and consider switching to lower charging investment funds.
- Be particularly wary of ‘fund-of-funds’ where you are paying an investment manager to select funds run by other managers (rather than directly selecting investments). Both managers need to be paid creating a double dose of charges.
Consider merging multiple pension pots
If you have several different pension pots, there are potential advantages if you consolidate them into one. You:
- can keep track of and manage your pension savings more easily
- may save money if you can transfer from higher-cost schemes to a lower-cost one
- may open up a greater choice of investments if you’re consolidating your pension pots into one flexible scheme
However, there are potential downsides to watch for too:
- In general it is a bad idea to transfer out of a defined benefit pension scheme – the guaranteed retirement income they offer shields you from investment risk.
- If any of your existing pension schemes offers Guaranteed Annuity Rates, then consider the implications carefully before transferring out – if you are planning on buying an annuity with your pension pot these guarantees are valuable.
- Check whether you’ll be charged by any of your pension providers for transferring money out of their scheme.
Again, get financial advice before moving your pension schemes, unless you are confident that you understand the costs, benefits and risks involved.
You can find FCA registered financial advisers who specialise in retirement planning in our Retirement adviser directory.