There are ways to improve your pension payout, without adjusting your monthly contributions.
My old cricket coach loved a good soundbite. His favourite was that cricket was a simple game, in that “you get out of it what you put into it”. Sadly, most of the time that saw us bowled out for pitiful scores, but the basic message has stayed with me ever since.
And if there’s one financial area that embodies that statement, it’s pensions. How much you get at the end is ultimately reliant on how much you pay in over the course of your life. Despite that, there are ways to influence your final pension pot that don’t revolve around the size of your monthly pension contribution.
#1 – Start early and stick with it
Because you aren’t going to see the benefit of your pension contributions until later life, it can be easy to put off paying into your pot, or taking breaks from payments. However, putting off payments can make a significant dent into your final pot.
If a 30-year old male started a pension today, and paid in £150 a month, by the time he reached 65 his pot would be worth around £114,802*. If he delayed that pension by five years, that fund would have fallen to £78,943. And in terms of projected annual income, the delay is the difference between £5,020 a year and £3,452, which could have a serious impact on his standard of life in retirement.
Even if you are in your 30s or 40s, every payment counts. So get started, and stick with it.
#2 – Use the Government’s cash
Some people prefer to save for their pension by using accounts like ISAs, as they don’t fancy exposing their money to the vagaries of the stock market. That’s understandable, but by doing so, they are missing out on free money from the Government, in the form of tax breaks.
All contributions to pensions enjoy tax relief depending on your tax band. So if you’re a basic rate taxpayer, then your contributions are topped up by 20%. So for every £80 you pay in, the Government pays in a further £20. Additional rate taxpayers can claim an extra 20% via their tax return.
By all means consider other ways of saving for your pension. But make the most of the Government cash on offer too!
#3 – Use your employer’s cash
Along similar lines to #2, many employers offer contributory pension schemes. This means that they will match your contributions, up to a certain point, say 5% of your salary. So as long as you pay in 5% from your monthly wage, your pension will actually be benefitting from payments of double that.
Even employers who don’t currently offer such schemes will soon have to. The Government is starting to roll out the NEST scheme (National Employers Savings Trust), an initiative which will oblige all employers in the UK to either offer their own pension scheme, or else sign up their employees to the centralised scheme, as well as matching payments up to a small percentage of the salary.
#4 – Move your investments
The vast majority of us have our pension invested in the stock market in the form of pension funds. These funds come in different shapes and sizes, so it’s important that you research exactly where that cash is invested.
For example, your cash may be in a managed fund, where the investment decisions are made by a fund manager. While some fund managers become superstars by consistently making great decisions and beating the market, sadly the majority do no such thing. Instead, you could put your money into an index tracker – as the name suggests, it tracks the movement of an index, so with a FTSE100 tracker, if the FTSE rises 5%, so will your money.
These funds will never beat the market, but at least won’t miss it by quite as much as some managed funds do!
Or perhaps you want to make all of the investment decisions on your pension, in which case a SIPP may be more appropriate. The point is that putting your money in the right places can make a significant difference toyour final pension pot size, without you needing to actually vary how much you are paying in!
It's also worth considering the charges which are applied to your pension. Shop around to see if there are low-charge alternatives, as these can quickly erode your pot.
#5 – Use the lump sum wisely
When you retire, you have the right to take a tax-free lump sum of 25% of your pension pot. It’s something that most people do – according to a survey by Prudential, 79% of people drawing a pension in 2011 did so.
The fact that is tax-free can really boost your financial position. Use it as income, and basic rate taxpayers are effectively getting an extra 20%!
#6 – Get the right annuity
Buying an annuity can seem like a stressful process – pages of forms to fill in, sometimes requiring some quite personal information. It’s no wonder that many pensioners can’t be bothered to shop around and simply accept the annuity offer from the insurer managing their pension fund.
This is a potentially very expensive mistake though, as shopping around can significantly improve your pension income. This is even more apt if you suffer from any illness or are a smoker, as you may qualify for an enhanced annuity, which can boost your income by 25%. Read When you're better off sick for more.
*Calculated using the Hargreaves Lansdown pension calculator. A number of assumptions are made, including annual growth rate of 7% and management charges of 1%.
Thanks to Matrix Capital and Verus Wealth for their help with this article.