From slashing investment fees to tracing lost pots, seven easy state pension tricks to add £20,811 to your retirement
TO enjoy a comfortable retirement you need to maximise your savings NOW.
In the past two years the minimum income needed in retirement has soared from £10,900 to £14,900 for a single person, according to the Pensions and Lifetime Savings Association.
With the full state pension at £11,500, you would need an extra £3,400 annually – from your workplace or personal pension – to reach the amount needed after tax, warns online service Interactive Investor.
This income should cover bills, with enough left for UK holidays, and eating out once a month.
But it doesn’t stretch to running a car or paying rent or a mortgage.
Harriet Meyer explains seven simple savings habits you can use to boost your pot.
TOP UP STATE PENSION
CURRENTLY, you can claim your state pension from the age of 66. This rises to 67 by 2028.
You need 35 years’ worth of National Insurance contributions to claim the full amount of £221.20 a week (£11,500 a year).
You need ten years to get any state pension at all.
Becky O’Connor, director of public affairs at online finance platform PensionBee, says: “If you are short, you can top up your state pension by ‘buying’ years, usually only from the previous six tax years.
“The amount you should get back in extra state pension income is usually more than the cost of buying the years.”
It costs about £824 to buy a missing year. This boosts your pension by around £329 a year. Over 20 years, that’s £6,580 in extra state pension.
Find out if you have any gaps at gov.uk/check-national-insurance-record.
MAXIMISE FREE CASH
IF you have a company pension, make sure you are getting all you can from your employer.
Currently, you should contribute at least five per cent of your salary into one, while your employer must pay in a minimum of three per cent if you earn more than £10,000 a year.
But some firms allow employers to pay in more. Some will match your contributions, paying in the same amount as you contribute to your pension.
This can make a massive difference to the size of your pension over a long period.
For example, a 49-year-old earning £30,000 and starting to save eight per cent into their pension could have a pot worth £60,000 by age 67, says Aviva.
That would buy an annual income of about £2,992 if they took 25 per cent as a tax-free lump sum.
But if they boosted their contributions to a total 20 per cent of their salary, with an extra ten per cent from their employer, they could have £230,000 by age 68.
This could buy an annual income of about £11,870 after taking 25 per cent as a cash lump sum. That’s an extra £8,878 every year in retirement.
Even paying a little extra into your pension can help.
Alistair McQueen, head of savings and retirement at Aviva, says: “Every penny benefits from extra investment growth, extra tax relief, and maybe an extra contribution from your employer.”
DELAY STATE PENSION
THE Government boosts your payments by one per cent for every nine weeks you hold off claiming state pension.
Delay for a full year and you could get an extra £667 annually — 5.8 per cent more — for the rest of your life.
Becky says: “This may be relevant for people who continue working past state pension age, for example.
“You can also start and stop claiming your state pension for a period of time, so that when you resume it, the amount you get can be higher.”
But it is important to find out if it is your right option.
If you are not yet at pension age, call Future Pension Centre, 0800 731 0175.
If you are retired, call the Pension Service, 0800 731 0469.
BOOST INVESTMENTS
YOUR pension is usually invested in default funds, which may not be the best option.
Usually these funds start off riskier when you are young then move chunks of your pot to more stable assets, such as cash, when you are nearer retirement.
For example, let’s say you are paying £300 a month into your pension, including employer contributions and tax relief.
Over 30 years, with an annual return of six per cent, you would have a pension pot worth £292,436, according to Interactive Investor.
A 66-year-old could buy an income of £15,616 a year after withdrawing 25 per cent of their pot tax-free.
But in a lower risk fund returning two per cent, it would be worth £147,383 at the end of 30 years.
This could buy an annual income of £7,870, or £7,746 less.
CUT CHARGES
INVESTMENT fees can take a chunk out of your lifetime savings.
Saving £300 a month into your pension over 30 years with an annual return of four per cent would produce a £198,605 pot, after a fee of 0.22 per cent.
The same pot on a two per cent fee would be £147,616, according to Bath-based Candid Financial Advice.
The 67-year-old retiring today could get an income of about £10,000 a year for life after withdrawing 25 per cent of their pot tax-free.
But this drops to £7,433 a year if they had paid an annual fee of two per cent — a £2,576-a-year difference.
FIND LOST PENSIONS
BILLIONS of pounds are sitting in forgotten pensions, with the average lost pot worth around £9,500, according to the Pensions Policy Institute.
If you have lost track of a £10,000 pension, you could be missing out on a guaranteed £394 a year for life in retirement, say Aegon.
To track down pensions from old jobs visit gov.uk/find-pension-contact-details or call the Pension Tracing Service on 0800 731 0193.
DON’T TAKE IT EARLY
STEVE Cameron, pensions director at Aegon, says: “Some are delaying their retirement, choosing to keep their pension invested for longer and accessing it at a later date.
This can give your pension more time to grow and once you start taking it, it needs to last for fewer years.”
For example, if a 66-year-old had a £150,000 pot, took 25 per cent as tax-free cash, and then used the remainder to buy an annuity, they could get an income of £4,933 a year for the rest of their life before tax.
“But if they delayed their retirement by a year, their income would jump by £218 a year to £5,151 before tax every year for the rest of their life,” says Steve.
To help understand the options, over-50s can book a free appointment with the Government’s Pension Wise service (0800 138 3944, moneyhelper.org.uk).