With the Budget just around the corner, and concerns about what this might mean for our retirement savings, many of us may be looking at ways we can future proof our pensions.
Lots of people are worried that we could see changes to tax relief, or the amount of tax-free cash you can take, announced in the Budget, but at this stage it’s impossible to know exactly what lies ahead. Although none of us can change what happens on October 30, what you can do is make the most of any tax relief and allowances that are currently available, so you can ensure that your savings are working as hard as they possibly can for you.
Here, we look at eight ways you might be able to future proof your pension so you can hopefully enjoy a comfortable retirement.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide 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 1,500 reviews on VouchedFor, the review site for financial advisors.
Contents
- Consider boosting your contributions
- Should you take your pension tax-free cash?
- Think about and regularly review your investments
- Don’t let steep charges eat into your pension
- Diversify across tax wrappers
- Build an emergency savings buffer
- Beware the effects of inflation
- Remember that doing anything is generally better than doing nothing
1. Consider boosting your contributions
If an overhaul of pension tax relief is announced in the Budget, many commentators expect that this may involve the Chancellor cutting the higher and additional rates and moving to a flat rate of relief. That means if you can afford to, you may want to consider boosting contributions now to benefit from current rules.
Jason Hollands, managing director at leading wealth management firm Evelyn Partners, said: “Even if pension tax relief survives unscathed in this Budget it might be best to “grab it while you can” – and as research suggests many workers are not saving enough to fund a decent retirement, then this could be a good time to raise monthly contributions.
“This might especially apply to those who are fast approaching retirement, e.g. in their fifties, but who fear their pension pot is not going to provide a desirable income. It might also include those who started their own businesses and were not able to contribute in the past – e.g. during tough times such as the pandemic – or who were struggling with bringing up families and paying big mortgages, but can now play catch-up.
“Once the current year’s pension allowance has been used up (a potential gross contribution of up to £60k), it is also possible to mop any unused annual allowances from the three previous years (starting with the furthest out) under “carry forward” rules. Use of carry forward means someone has the potential to make a very large pension contribution ahead of any possible changes to pension tax reliefs.
“It is wise to seek out some professional advice to work out how much you could contribute and still benefit from the tax reliefs, as this will depend on your earnings. For example, the very highest earnings are subject to a complex calculation on their pension allowances, which are tapered down from the maximum allowance dependent on their total earnings across all sources of income.”
You can learn more about how carry forward works in our article Should you take advantage of pension carry forward rules ahead of the Budget?
2. Should you take your pension tax-free cash?
There’s been lots of talk about whether the Budget will restrict the amount of tax-free cash you can take at the age of 55 (rising to 57 from 2028).
Under current rules, you can currently take a maximum pension tax-free cash lump sum of up to £268,275 out of your pension, which is equivalent to 25% of the old Lifetime Allowance. This is known as your Lump Sum Allowance (LSA). Find out more in our article How much tax-free cash can I take from my pension?
However, it’s really important not to rush in and withdraw a tax-free lump sum, unless you have a clear plan as to what you’re going to do with it. That’s because anyone who takes money out of their pension is removing their money from a wrapper where their savings grow tax-free, and is putting them into a taxable environment.
Sarah Coles, head of personal finance at Hargreaves Lansdown warned: “If they switch into savings, they’re seriously hampering its growth potential in the coming years. They could also devastate their income plans for later. Whether they’re planning to buy an annuity or draw a percentage of the pot, the more they take as cash, the lower their ongoing pension income will be. Then there’s inheritance tax. Money kept within a SIPP or pension is usually not subject to inheritance tax. Taking it from this environment and putting it into an ISA or bank account could potentially leave their family with a nasty surprise bill.
“Even if there was a tweak to tax free cash, which would seem unlikely, it’s highly unlikely to be an immediate change, giving people time to consider the full pros and cons before taking any action.”
Learn more in our article Should I take my pension tax-free cash before the Budget?
3. 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. Those that will suit you depend 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 continue to 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 stocks and 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 carry 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?
4. 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 1.5-2% are considered expensive, so if you’re paying this amount, it may be worth considering moving your pension into 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 communication. Find out more about the impact of pension charges in our guide What pension charges am I paying?
5. Diversify across tax wrappers
Pensions aren’t the only way to save for retirement, so it’s well worth exploring other ways you might be able to build your retirement savings, such as individual savings accounts (ISAs). That way, if pensions are substantially impacted by the Budget, you’ll have at least some protection as you’ll also have savings elsewhere.
Remember however, that under current rules 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 on your contributions, 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 should be ble to 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?
6. 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.”
7. 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?
8. 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, regardless of what happens in the Budget. 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 considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide 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 1,500 reviews on VouchedFor, the review site for financial advisors.
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