Follow our simple pension top-up tips on how to make the most of your savings today and it could help your money go further in retirement.
As we approach the end of the year, now’s the time to start planning for next year and the years to come. And when it comes to your pension plan there really are plenty of reasons why taking action today could help to give you more to look forward to in the future.
We’ve put together five pension tips that could help you give your savings a boost and set you up for success later. Whatever your plans are for the future, if you follow these simple steps and invest some of your time now, the benefits could last you a lifetime.
1) Top up your pension payments over time
If your monthly budget allows, why not think about increasing your pension payments? Some people tend to top up their pension payments when they’ve had a salary increase, others increase their payments in line with a rise in inflation – something to think about since inflation in the UK is expected to rise to above 4% by the end of the year. But even putting in as little as £10 extra a month could go a long way, especially if you start when you’re young.
Remember your pension savings are invested, which means everything you save into your pension pot benefits from compounding – that’s the effect of potential growth on growth. Over a few months or a year, the effect may be small but over a longer period you could build up the value of your pension investments significantly. You can find out more about compounding in Why invest instead of save?
And, if your circumstances allow, why not top up your pension by making one-off payments when you can? If you receive a windfall, such as a work bonus or an inheritance, you could put some or all of it in your pension pot.
Remember that there are no guarantees, investments can fall as well as rise in value and you could get back less than you paid in.
2) Make the most of pension tax relief
The more you pay into your pension pot, the more tax benefits you’ll normally get. The amount you get usually depends on the rate of income tax you pay. For most of the UK this means a basic rate or non-taxpayer is entitled to 20% tax relief, a higher rate taxpayer gets 40% and an additional rate taxpayer gets 45%. For example, if you pay basic rate tax, for every £80 you pay into your pension plan HM Revenue & Customs (HMRC) pays in £20.
Remember that income tax is slightly different in Scotland, but the effect on your pension contributions is pretty much the same. You can find out more about income tax at Gov.uk
Typically your pension provider will add basic rate relief at 20% to the amount you pay into your pension plan. And if you’re a higher rate taxpayer you could claim an extra 20% relief from HMRC. Some pension schemes give tax benefits in a different way so do check with your provider if you’re not sure.
Just think of all the pension top-ups you could receive over the years. And remember that all these top-ups have the potential to benefit from the compound growth we mentioned earlier.
You can find out more on pension tax relief in How does pension tax relief work?
3) Regularly review your pension investments
How you manage your pension investments may depend on how much time and experience you have, as well as how much financial responsibility and risk you feel comfortable taking on. You can either choose and manage your own investments, or let investment professionals do this for you.
If you’re in a workplace pension then there’s usually a ‘default’ option where your pension payments will be invested if you don’t want to make a choice. The good news is that default options are usually designed to aim to get your money to where it needs to be by the time you come to access it. And they’re reviewed regularly to make sure they remain appropriate for members like you. Our do-it-yourself or delegate guide can help you decide which route is best for you.
Even if you decide to delegate investment decisions to professionals, try to make time to regularly check your investments and make sure they’re on track to meet your plans. This is especially important as you get closer to taking money out of your pension pot. Read our guide to choosing the right investment options in retirement to understand what you need to think about when you reach that point.
4) Think long term and diversify
As your pension savings are invested, they can go up and down regularly in value. But you’ll usually be saving into your plan for many years. And generally over longer periods investments can provide better returns than, for example, putting money in a savings account. So try not to worry when you see these ups and downs, and focus on the long term.
You can reduce the risk of large ups and downs in value by having a mix of different types of investments – also known as diversifying. Most workplace default investment options will already do this for you. Many personal pensions also have options that package together different types of investments if you don’t have the time or experience to build your own portfolio. You can explore the ready-made options we have available on our website.
5) Think about bringing all your pension plans together
Life tends to be easier when it’s organised. So, if like many people you’ve collected several pension plans over the years from different jobs, it could make sense to combine them.
It’s not right for everyone, but it can be a good way to get a better picture of your overall pension value, make it easier to check if pension investments are on track and could cut down on costs too.
Please be aware there’s no guarantee of a better pension plan by transferring into one plan and you could be giving up valuable benefits or guarantees held with other plans.
There’s more information about transferring your pension plan to Standard Life on our website or visit the MoneyHelper website. And if you don’t have a financial adviser, try unbiased.co.uk to find one in your area.
Now you know how using these pension top-up tips to pay a little more attention to your pension today could make a big difference to your future. So why not start now?
The value of investments can go down as well as up and may be worth less than was paid in.
Tax and legislation may change. Your personal circumstances and where you live in the UK will also have an impact on your tax treatment.
The information here is based on our understanding in November 2021 and shouldn’t be taken as financial advice.