Many people do not engage with their pension savings in the same way that they manage their bank account or look after their other investments. Those who don’t use a financial planner may have a firm grasp on their current or saving account balances, but even though they are making regular payments into a pension pot every month, they may not know how much retirement savings they have in total. Most importantly, they do not know how much income this will produce when they retire. It can come as an unwelcomed surprise that their pension savings may not produce the income needed or expected. There are steps however that can be taken to correct this.
How to correct a shortfall in your workplace or personal pension?
There are two main options you can take to correct a shortfall in your personal or workplace pension scheme. Firstly, you can top up your pension pot by adding to an existing scheme, or start an additional one if that is a better option for you. If you can’t afford to do this, or don’t have enough time left before retirement age to be able to build up additional pension contributions, then the second option is to delay the date on which you will start to take the benefits from your pension savings. Some people choose a combination of these two methods.
There are tax incentives to saving into a pension scheme over other savings accounts, such as an ISA. Maximising your pension contributions in the years before retirement brings an immediate boost in the form of tax relief, based on the rate of income tax you pay. For example if a basic or higher-rate taxpayer contributes £800 into their pension, the government adds £200 in the form of tax relief, so £1,000 is contributed into the pension scheme. In addition to this, a higher-rate taxpayer can also claim a further £200 of higher-rate relief through their tax return, effectively reducing the overall cost to them of the £1000 gross contribution to just £600. There is a limit on the contributions you can pay into your pensions each year that qualify for tax relief, and you should check these limits before making large contributions.
Delaying when you start taking your retirement income helps in a number of ways. It allows more time for you to contribute to your pension pot and more time for it to potentially grow – so you may have accumulated more savings by the time you retire.
If you plan to buy a lifetime annuity, which provides a guaranteed income for life, then it could be that you receive a higher income when you do eventually retire. This is because annuity rates increase as you grow older, so delaying may mean you will receive a higher income, subject to overall annuity rates not falling. Your pension provider may apply charges for changing your retirement date, so it is important you check this before changing your plans.
What you should not consider doing is to increase the level of investment risk you take with your current pension savings if you are less than five to ten years away from your chosen retirement age. In fact it is usual at this stage to start to reduce the amount of risk, in order to reduce the impact of any stock market falls. Whilst the potential to make higher gains might be tempting, if the investments fall in value, which they easily could, then there may not be time for them to recover before you retire.
How to correct a shortfall in your state pension?
You need to have completed at least 35 qualifying years of National Insurance contributions to get the full basic new State Pension (currently £155.65 per week, the current State Pension is £119.30 a week). These contributions can be a mix of those you have paid and others you are treated as having paid, for example, during periods when you were bringing up young children or unable to work because of health problems. If you have fewer qualifying years, then your pension entitlement will be proportionately lower, however you can make some top up payments to bridge this gap. The cost for each ‘missing year’ will depend on your circumstances.
Planning for retirement is an important step for everyone and early planning can reap rewards that may be more difficult to achieve the closer you get to your retirement.
If you would like to review your pension savings or find out more about how to bolster your future pension income then speak to your financial adviser or email us at firstname.lastname@example.org.