Whether you’re still paying into a pension or already drawing an income from your pot, it can be difficult to know how best to manage your retirement savings during turbulent economic times.
While inflation fell to 3.2% in March, this is still higher than the government’s 2% target. If you’re struggling to make ends meet, you may be tempted to withdraw money from your pension once you reach age 55 to help you cover costs. If you’re relying entirely on your pension to provide you with an income, you may worry about your savings lasting the rest of your life as stock markets fall and living costs soar.
Here, we look at various ways you may be able to boost your pension during this difficult period, and hopefully increase your retirement income.
If you’re thinking about getting independent financial advice, financial services company Fidelius is offering Rest Less members a free initial consultation with an independent financial advisor to chat about your finances, where you are now, and where you want to go.
There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Fidelius is rated 4.7/5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
1. Review your pension investments
It’s important to check where your pension contributions are going, and that your investments haven’t become too skewed towards a certain market or particular type of holding.
If you’re paying into a workplace pension you’ll usually be invested into a so-called ‘default fund’, unless you’ve chosen a different fund. The default fund automatically changes the underlying investments as you approach retirement. The closer you get to retirement, the more you’ll probably be moved into investments that are considered less risky such as bonds and cash. However, if you still have some time to go until retirement, you may be comfortable taking more risk with your investments, and most workplace schemes offer a range of funds that you can switch to. Read our article Where is my pension invested? for more guidance on choosing the right option for you.
If you’re paying into a personal pension, or self-invested personal pension, again you’ll have a choice of different investment options. Find out more in our articles What is a SIPP? and What are the different types of pensions?
During volatile stock market periods, it can be difficult to know how best to manage your investments, but the best decision is usually to keep a calm head, avoid selling at a loss if possible, and ensure your portfolio is well-diversified. This means including a wide range of different asset types such as both UK, global and emerging market equities, bonds, and alternative investments such as commodity and commercial property funds. You can check how diversified your investments are by using an ‘X-ray tool’ such as the one from Morningstar.co.uk. This shows where you might hold too much in a particular type of investment, and you can use this information to further diversify your holdings.
2. Check your pension charges
It’s important to check the charges you’re paying on your pension. While a 0.75% charge may not sound much, this can rack up and eat into returns over the years. If you have an older-style personal pension, or a workplace pension from decades ago that you’re no longer contributing to, you may be paying more than 1% in charges.
The majority of pension providers charge a percentage fee, which may range from a low 0.15% a year to more than 0.75%. If you’re paying more than 0.75%, this is usually considered expensive now that there are plenty of low-cost providers to choose from. Some providers charge a flat fee, which may be preferable for larger pension pots, as no matter how large your pension grows, your fee stays the same. Find out more in our article What pension charges am I paying?
3. Consider consolidating your pensions
Chances are, you’ve paid into several pensions over the years, so it’s worth checking whether you might be better off moving some or all of these to a cheaper provider. These days, it’s a fairly straightforward process to transfer your pensions into a low-cost pension plan, and over decades this could save you tens of thousands of pounds in fees. Moving your pensions into a single pot could also make them easier to manage, as you’ll only have one account to keep an eye on.
However, consolidating your pensions isn’t always the right option as, for example, some older pensions come with valuable benefits such as guaranteed annuity rates, or higher amounts of tax-free cash. Transferring a final salary pension into a personal pension plan is usually not the right decision, and you can find out why in our guide Should I transfer my final salary pension?
If you’re thinking of transferring your pensions, you need to establish what kind of pensions you currently have, and if you’re in doubt, it could be worth speaking to a professional financial adviser. Find out more in our article Should I consolidate my pensions?
4. Check your fund charges
Similarly, if you hold various funds in your pension, look for the ongoing charges figure (OCF) to see how much you’re paying for your investments. The majority of ‘active’ funds that have a manager choosing where your money is invested cost more, with charges ranging from about 0.6% to 1.5%. If you’re using active funds, try to ensure charges are below 1%, unless you have faith that the particular fund is going to perform really strongly in the future, and make high charges worthwhile.
Tracker funds, on the other hand, also known as passive funds, aim to replicate a particular stock market’s performance, and are usually much cheaper than active funds. They can be a useful core addition to a portfolio, making up as much as, say, 70%, with a few active funds added to the mix for greater diversification. Charges for trackers are usually below 0.5%, and costs can be as low as 0.15%.
5. Increase your pension contributions
The obvious way to increase your pension savings is to simply pay more into your pension, but right now this can be a challenge with most of us financially stretched as living costs soar. If you are able to pay more into your pension, however, it’s usually worth doing so, and particularly when stock markets have fallen. That’s because your money buys more investment units when the stock market falls, and fewer when it rises, which helps smooth out volatility. The tax relief on your contributions is also generous and worth making the most of, as it will give your savings an immediate boost. When you pay into your pension, the government will also pay in, with the amount you receive tied to your income tax rate.
Basic-rate taxpayers get 20% tax relief, while higher-rate taxpayers receive 40% pension tax relief. They get 20% automatically and then can claim an additional 20% via their self-assessment tax return. Find out more in our guides How pension tax relief works and How do I reclaim higher rate pension tax relief? If you’re paying into a workplace pension, it’s worth seeing if your employer will match your contributions, so the more you put in, the more they pay in too.
You can continue to receive tax relief on your pension contributions right up until you reach age 75. However, once you’ve started taking money out of your defined contribution pension, which you can usually do from age 55 onwards, your Annual Allowance, which is the amount you can pay into your pension and receive tax relief on, falls from £60,000 a year, or 100% of your annual earnings, to £10,000. This is known as the Money Purchase Annual Allowance (MPAA). Read more in our article How do pension allowances work?
6. Make use of salary sacrifice
If you’re paying into a workplace pension scheme, you may want to ask your employer about making pension contributions through a salary sacrifice arrangement. This way, you agree to a reduced salary in return for this money being paid, along with your employer’s contribution, into your pension. As your salary is reduced, the amount of National Insurance you and your employer pays also falls.
Some employers will also pass on savings in National Insurance via salary sacrifice to your pension, but you’ll need to find out how your particular scheme works. Salary sacrifice won’t be the right option for everyone, however, and its advantages depend on various factors, such as your income level. Bear in mind that it could reduce your entitlement to certain benefits such as statutory sick pay and maternity pay. Find out more in our article What is salary sacrifice?
7. Find lost pensions
If you’ve worked for several employers over the years, you may have lost track of a pension or two. Tracking down missing pensions and getting hold of any missing retirement funds could make a big difference to your retirement savings. If you know which pension provider an old pension is with, call their customer service number and see if you can get your details. You might be able to find some old paperwork with the provider’s name and your account details on.
If you cannot remember which provider you were with, or your employer used, you could start by contacting your former employer. You’ll probably need your National Insurance number, name and address to find your old pensions. If you cannot track down an old pension you can use the government’s Pension Tracing Service (0800 731 0193). You’ll need the name of an employer or pension provider to use the service, and it should be able to help you find contact details. However, the service won’t be able to tell you whether you have a pension, or its current value. Find out more in our guide How to find old pensions and trace lost pensions.
8. Delay your retirement
By putting off your retirement, even for a year or two, you can keep your pension fully invested for longer, giving your investments the chance to ride out stock market turbulence. However, this won’t be an option for everyone, and will depend on your personal situation.
What’s most important is that you avoid any panic selling, as you’ll only cement investment losses, and to consider whether you really need to access your pension right now. Current market conditions are having an impact across all types of assets, so no matter where you’re invested, it’s likely you’ll have suffered some paper losses.
Hopefully, given more time, your pension may recover its value and by delaying your retirement your pot won’t have to last as long.
9. Seek professional help
It’s more important than ever to find all the ways you might be able to boost your retirement savings, as the cost of living soars and stock markets are falling. If you’re looking at your options for producing an income from your pension savings, you can receive free guidance from the age of 50 and above from the Government’s Pension Wise service.
If you want advice that’s tailored to your personal situation and help with choosing and managing investments, you can find a local financial adviser on VouchedFor* or Unbiased*. For more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re thinking about getting independent financial advice, financial services company Fidelius is offering Rest Less members a free initial consultation with an independent financial advisor to chat about your finances, where you are now, and where you want to go.
There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Fidelius is rated 4.7/5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
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