If you’re retiring this year, you can expect to live on £18,100 a year, £600 lower than the 2008, according to Prudential. Yours money editor Sarah Jagger shares her tips to help boost future pension savings
1. Work out how much you need
Broadly speaking, you should be able to live off 70 per cent of your working income without feeling financially uncomfortable. Saving that much can be a challenge, even including the State Pension, says Karen Barrett at unbiased.co.uk. “Try the 12.5 per cent rule; if you can save this proportion of your monthly income into a pension, you should be on course.”
- Get a clearer picture of how much money you need with an online calculator such as Aegon's retiready tool.
- Get a State Pension forecast by calling the Future Pensions Centre helpline on 0345 3000 168 or visit gov.uk.
2. Keeping paying into your pension
Pension contributions are the best way to save for retirement. Pay as much into your pension as you can afford. Dependent on your taxable income, you can receive a boost from the Government in the form of tax relief on every £1 you save in a pension. If you pay £100 into it, you’ll receive tax relief of £25, turning that £100 into £125. Higher and Additional rate taxpayers can claim further relief via their tax return or through their monthly pay, of up to £25 to £31.25
3. Pay off your debts
Getting on top of debt is important as you near retirement. Hopefully you will have paid, or will be close to paying off your mortgage. If you have other debts such as credit cards or loans, try to pay these as soon as you can, ideally before you stop working.
- For help getting out of debt, contact your local Citizens Advice Service, or visit citizensadvice.org.uk or call the Money Advice Service on 0800 138 7777, moneyadviceservice.org.uk.
4. Get the best return on your pension
Most workplace pensions are invested in default funds which are designed to suit everyone – which in practice means that they suit almost no-one! Speak to an independent financial adviser who can look at the alternative funds offered by your workplace scheme and choose the one that suits your circumstances and time of life - it could make a huge difference to your pension pot.
Consider switching older pensions to a new provider, too. “Many older pensions take a big chunk of your growth away with their costs,” says Bob Stark at financial adviser Portafina. “Modern technology means newer pensions are cheaper to run, which in turn means you get the maximum benefit from your investments. Invest as much as you can afford as early as possible to get the compound interest working for you for as long as possible.”
5. Make tax more friendly
Make the most of your tax-free allowances, tax bands and tax-friendly savings such as ISA and pension. The less tax you pay the more of your money you can keep for your retirement:
- Non earners can contribute £2,880 per annum and receive £720 in tax relief, boosting pension savings to £3,600
- Marriage allowance allows those where one partners earns less than £11,500 to transfer £1,150 of their personal allowance to their spouse. This reduces their tax by up to £230 in the tax year 2017/18. If you were eligible for Marriage Allowance in the 2016 to 2017 tax year, you can backdate your claim to April 6th, 2015 and reduce the tax paid by up to £432
- A higher-earning spouse should always consider moving personally or jointly held cash into the lower-earning spouses name. A higher rate taxpayer with cash savings of £100,000, earning interest of 2.5% would pay £1,000 in tax. Moving part or all to a non-tax payer could reduce this to £0.
Where to save for retirement outside of a pension
- Use your annual ISA allowance, currently £20,000, to shelter money from tax on savings’ interest and gains on investments. Build up a nest egg to provide a tax-free income stream
- The new Lifetime Isa (LISA) offers those under 40 the opportunity to save toward their first home and receive a 25% bonus from the government. All you need to know about the LISA
- Bricks and mortar provide an income as well as the potential for capital increase but you have to look at the additional costs, such as maintenance and borrowing money to do it. And if there’s a housing crash you could lose badly.
Where to get help with your pension
- All you need to know about work pensions and auto-enrolment
- For more help with your retirement planning go to Yours Retirement Services