Having hit the dreaded age milestone this year, the NHS check-up letters started to arrive and my appointment at the opticians became more expensive than before. It made me think about fellow Gen-Xers who maybe either haven’t started thinking about retirement yet or are concerned that their pension ‘pot’ is insufficient for their retirement needs and is it too late to do anything about it?
When we were young (yes, I know we still think we are) the concept of our retirement was a long and distant one, something that happened to our parents and will not affect us for some time yet. This, in addition to the current cost of living crisis and 30-year high inflation rates, the priority has been very much the here and now. It has been difficult to focus on the next decade or so for everyone.
Obviously, the earlier you start saving, the better. However, the good news is that it is never too late to start a pension, whatever your age. Saving in later life can help to boost your pension pot more than you think, and as a well-known supermarket espouses – ‘Every little helps!’
There are three main actions you can take now to boost the final pot at retirement.
- Pay into a personal pension – maximise tax relief
A pension is a very tax efficient way of saving money. This is due to the addition of tax relief onto contributions.
Therefore, if you are a basic rate taxpayer, a £100 contribution from your salary only costs you £80. The government adds the extra £20 on top, the tax it would have taken from your £100 salary.
If you are a higher, intermediate, or top rate taxpayer, then you can claim the extra relief via your annual self-assessment tax return.
Obviously, if there is a tax incentive then there will be limitations. As the rules stand at the time of writing, if you are a UK taxpayer then you can obtain relief on 100% of your relevant earnings or £40,000, whichever is the lower per tax year. However, you can carry forward unused annual allowances from the previous three years if you were a member of a pension scheme during those years.
There is also a Lifetime Allowance limit of £1,073,100 in 2022/23. There are penalties if your pension pot breaches this figure at any time.
- Join the workplace pension
If you have been an eligible employee since 2012, when the Government introduced auto-enrolment on a rolling basis to encourage more people to save for their retirement, then you will have been offered the opportunity to join your workplace pension.
Under current auto-enrolment regulations, a minimum of 8% of your gross salary between £6,240 and £50,270 (2022/23 tax year) must be paid into your pension, dependent on what earnings basis your employer uses.
This is split between your and your employer’s contributions, the latter being a minimum of 3%. Therefore, unless you are close to the Lifetime Allowance limit, it makes absolute sense to join the scheme as otherwise you will miss out on valuable employer contributions. You can of course pay in more than the minimum.
You can pay into more than one pension at the same time (e.g. a personal pension and a workplace pension) as long as you don’t exceed the annual allowance of £40,000 or more than your PAYE relevant earnings for that year, whichever is the lower. You can pay in more than £40,000 by using up unused allowance from the previous 3 years but you must have relevant earnings to support it.
- Consolidate your pensions
As you have reached the aforementioned age, you could well have been in employment for 30 years, even taking into account possible maternity breaks. Therefore, you may have accumulated more than one pension over the years.
The charges involved in modern pensions have reduced considerably in recent times.so by consolidating your pensions it may help to reduce the costs and therefore the erosion of your retirement pot.
The consolidation of pensions is a complex area with many pitfalls and may not be suitable for your circumstances so regulated advice should be sought before taking any action.
Summary
When you reach 50, your earnings may be at their highest so, dependent on affordability, you should maximise your pension planning if you can. Even though you may feel that its too late to start a pension, the above actions prove that you don’t necessary need complicated strategies and should give you a chance to boost your pot at retirement and beyond.
Gary Stirling is a financial planning specialist within our Wealth Management Division. He is a Member of the Chartered Insurance Institute with professional qualifications in Financial Planning, Mortgage Advice and Regulated Customer Care. If you want advice on planning your pension strategy Gary can be contacted on gstirling@thomsoncooper.com or call 01383 628800.