Even if retirement isn’t far away, there are steps you can take to increase your retirement income. This applies both to your State Pension entitlement as well as to any personal or workplace pension pots that you have. Read on to find out what you can do.
- The two key options – pay in more or defer
- Increasing workplace or personal pension contributions
- Delaying your workplace or personal pension
- Making the most of your State Pension income
The two key options – pay in more or defer
You still might have time to boost your pension – you have two main options:
- delay the date on which you’ll start taking your retirement income
- top up your pension pot, whether by adding to an existing scheme or starting an additional one.
It’s very risky to try to boost your pension pot by investing in higher-growth investments in the run-up to retirement.
If the investments fall in value, there might not be time for them to recover before you want to start drawing from your pot.
Increasing workplace or personal pension contributions
Making the most of your pension contributions in the years before retirement brings an immediate boost in the form of tax relief.
This is particularly true if you are a higher-rate taxpayer, as the following example illustrates:
- A higher-rate taxpayer contributes £80 into their pension.
- The government, in the form of tax relief at the basic rate of 20%, adds £20 which boosts the overall contribution to £100. This is still the case if you live in Scotland and pay the starter rate of 19%.
- The taxpayer can then claim a further £20 (England, Wales and Northern Ireland) or £21 (Scotland) of higher-rate relief through their tax return. This effectively reduces the overall cost to them of the £100 gross contribution to just £60 (England, Wales and Northern Ireland) or £59 (Scotland).
In Scotland, there is also an intermediate tax rate of 21% for earnings between £24,944-£43,430. If your earnings fall within this band you can claim the additional 1% on pension contributions through your tax return or by contacting HMRC.
There is a limit on the contributions you can pay into your pensions each year that qualify for tax relief. Follow the link below for more information.
Delaying your workplace or personal pension
Delaying when you will start taking your retirement income could boost your pension 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 might have accumulated more savings by the time you retire. However, you might need to think about changing the way it’s invested to reduce your exposure to any potential fall in your investments.
- Rates for guaranteed income products (annuities) also increase as you grow older. So, if you’re considering using your pension pot to buy a guaranteed income, delaying might mean you’ll receive a higher income, as long as overall annuity rates are not falling.
If you’re thinking about delaying taking your pension, check with your provider whether there will be any charges for changing your retirement date.
Also read our related guide below, which outlines both benefits and potential risks of deferring your pension.
Making the most of your State Pension income
If you reach State Pension age on or after 6 April 2016, then you’ll need at least 35 qualifying years of National Insurance contributions to get the full new State Pension of £168.60 per week.
These contributions can be a mix of those you have actually paid and others you’re 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.
For example, if you have 23 years of National Insurance contributions, then you’d be entitled to two thirds of the full pension.
Because working lives tend to be 40 years or so, many people will meet the 35-year condition.
But if you don’t, you might be able to fill in some gaps in your National Insurance record by making voluntary contributions now.
Missing National Insurance contributions
If you’re not sure whether you’re on track to have made the National Insurance contributions needed to get the full basic State Pension, you can request a State Pension statement which might help you decide.
You can find details about how to get a new State Pension statement on the GOV.UK website.
Voluntary National Insurance contributions
If you want to fill in any gaps in your National Insurance record, normally you must make the top-up payment within six years of missing the original payment.
There are some exceptions when you can buy years further back.
The cost for each ‘missing year’ will depend on your circumstances.
Find out more about voluntary National Insurance contributions on the GOV.UK website.
Deferring the State Pension
Delaying the date you start taking the State Pension can make a big difference to the level of pension you’ll get.
For those who reach State Pension age after 6 April 2016, the new State Pension rules will apply which means your State Pension will increase by 1% for every nine weeks you defer.
This works out as just under 5.8% for every full year.
The extra amount is paid with your regular State Pension payment.
You can find out more about deferring your State Pension on the GOV.uk website.
This article is provided by the Money Advice Service.