With a general election just around the corner, and concerns about what impact the outcome could have on our retirement savings, many of us may be looking at ways we can future proof our pensions.
Most people are worried that we could see the introduction of tax increases following the election, but at this stage it’s impossible to know exactly what lies ahead. You can find out what the various political parties are promising in our guide What the election could mean for your pension. Although none of us can change the outcome on July 4, or what happens after that, what you can do is make the most of any tax relief and tax wrappers that are currently available, and ensure that your savings are working as hard as they possibly can for you.
Here, we look at six ways you might be able to future proof your pension so you can hopefully enjoy a comfortable retirement.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
1. Diversify across tax wrappers
Pensions aren’t the only way to save for retirement, so it’s well worth exploring other ways to build your retirement savings, such as individual savings accounts (ISAs). That way, if pensions are substantially impacted by a change in government, you’ll have at least some protection as you’ll also have savings elsewhere.
Remember however, that one of the biggest current advantages of saving into a pension is that you get tax relief on the money you pay in. This means that if you’re a basic rate taxpayer, for every £80 you contribute, you’re actually putting away £100 as the taxman refunds you the £20 in income tax it would have taken. Higher-rate taxpayers can claim a further £20 back through HMRC, resulting in a net cost of only £60 for a pension contribution of £100. You can find out more in our article How pension tax relief works.
When you save into an ISA, although you don’t get tax relief from the Government, as with a pension you won’t be charged tax on the savings interest or any capital gains you make on your investments. The maximum you can pay into an ISA in the current tax year (2024/25) is £20,000. You get a new ISA allowance at the beginning of each new tax year starting on April 6, so if you can afford to put money away every year, you can create quite a significant tax-free savings pot over time.
Find out more in our article Is it better to save into an ISA or a pension?
2. Build an emergency savings buffer
If you’re focused on building up as big a pension pot as possible in the run up to retirement, the last thing you’ll want is to have to dip into it if you suddenly find yourself having to cover any unexpected expenses.
Try to build up some emergency savings if you haven’t already so that you have some money readily available in case of emergencies. You can learn about building a buffer in our article How to build an emergency fund.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “When we’re retired, we have even more of a need for emergency savings than when we’re working. The rough rule of thumb is that when we’re working age we should have 3-6 months’ worth of essential expenses in an easy access account for emergencies, and when we’re retired, this rises to 1-3 years’ worth. This is because we no longer have the ability to work our way out of a crisis.”
3. Don’t let steep charges eat into your pension
Annual management charges for pension schemes have reduced significantly in recent years, since a cap on charges was introduced back in 2015. These days, annual charges of 1-2% are considered expensive, so if you’re paying this amount, it may be worth considering moving your pension to a cheaper plan.
Bear in mind, however, that charges aren’t the only consideration to weigh up when reviewing your pension, and lower charges don’t necessarily always mean a better deal. For example, if you belong to a workplace pension scheme charging between 0.6% and 0.8% that communicates well with you, tells you how you can pay more and what you can do when you retire, this may be better than an alternative scheme which has lower charges but only offers a limited range of investment options and has poor communications. Find out more about the impact of pension charges in our guide What pension charges am I paying?
4. Think about and regularly review your investments
When you pay into a pension, your provider will usually offer a range of investment funds for you to choose from. Which will suit you depends upon the level of risk you are prepared to take and how far from retirement you are. Remember that just because a fund has performed well in the past doesn’t mean it will do so in the future. However, it’s definitely worth avoiding funds that have consistently performed badly.
Bear in mind too that, historically, investments which carry the most risk, for example shares, have usually produced the best returns over the long-term. But selecting investments which are described as relatively safe, or less risky, doesn’t mean they have no risk. They may not be as potentially volatile as shares but low returns may mean the value of your savings won’t keep up with inflation. If you are at all uncertain – get independent financial advice. You can find out more about why the funds you invest your retirement savings in matter in our article Where is my pension invested?
5. Beware the effects of inflation
Inflation might have eased for now, but a prolonged period of double-digit inflation means that your pension pot might no longer be enough to provide you with the comfortable retirement that you hoped it would. That said, higher interest rates mean that your pension could provide you with a higher income than it could have previously, so it’s not all negative news.
A constantly changing economic and political landscape can make it really difficult to know whether you’re on track for a comfortable retirement or not, so if you’re not sure, it’s worth thinking about getting a pension review so you know exactly where you stand. Learn more in our guide How does inflation affect my pension?
6. Remember that doing anything is generally better than doing nothing
There are plenty of mediocre pensions out there with high charges or poor performance (or both). But nearly all of them are still better than not saving any money at all. It’s never too late to get started and the cost of delay is huge; putting off starting a pension for around 7 years will have the effect of halving the eventual income you get in retirement.
If you’re just getting started with pensions, read our guide Your five-step guide to starting a pension in your 50s or if you’re looking for ways to give your pension a boost, check out our article How to boost your retirement income.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.