The nights may still be long but the end of the tax year is fast approaching – so now is the ideal time to think about your pension. Here are six things you need to do to refresh your pension.
Step one: Forward planning
The most effective way to plan for your retirement is to think of it in terms of the lifestyle you aspire to and therefore the retirement income you will need to achieve that goal.
While this is not as simple as it sounds, the most important step is the first one. Don’t keep putting it off. Grab a cup of tea or a glass of wine, sit down and add up your monthly expenses now and make an estimate of what they will be at the time you retire. Ask yourself: do you expect to have paid off your mortgage before retirement? Do you think you want to downsize? Will you want to take advantage of pensions freedoms?
James Davis, Independent Financial Adviser at Pension Works, is clear:
“The secret to a healthy pension is forward planning.”
Step two: Tot up how much your pension is worth
This is a calculation that some find scary but there are several pension calculators online. Plus if you have a private pension, your pension provider should be sending you an annual statement that shows how much your pension is worth. If you’re not sure what your state pension age is and how much you expect to get from the state, you can find out more here.
Step three: Check your previous employers
You don’t need to re-train as a financial adviser to plan your pension but you do need to keep track of the pensions you have. As James points out, few people these days stay with a single employer for life. Indeed, the average worker in Britain today has six jobs in a working lifetime.*
“The problem when it comes to pensions is that few of us keep tabs on the schemes we have paid into,” James says. “The government estimates that by 2050, £50 million will be left in unclaimed pension pots.”^
Step four: Contribute more, and your employer may follow
Don’t let concerns that you can’t save as much as you need stop you from saving anything. As James explains: “It’s much better to save what you can and look to build on this as you can afford more, rather than doing nothing.
“Now is also the perfect time to up your contributions, and if you are in an occupational or employer scheme, your employer may agree to match your pension contributions – effectively giving you a small pay rise. Best of all, when you put money into a personal pension, the taxman also chips in.”
You have until 5 April 2018 to make the most of this year’s tax-free allowance, which is currently capped at £40,000. James says: “That’s a lot, but in the years leading up to your retirement, you need to be aware of it.
“And if you are a basic-rate taxpayer, for every £1,000 you put in the taxman adds another £250,” James says. “If you pay the 40% or 45% tax rates, you can get even more through adjusting your tax coding or as a rebate from HMRC. Just make sure you use it.”
Step five: Step by Step
It may be a stretch to increase your contributions now, but it is worth making it a priority. Small, regular increases can go a long way and because pensions benefit from compound interest, the sooner you get money into a pension pot the more value it will have at the time you retire. As James points out, even a small tweak such as an additional contribution of 2% of your annual salary can add up to thousands over 10 or 15 years.
Step six: Repeat
This should not be a one-off exercise. While it is better to have done it once than not at all, it is even better to always keep an eye on your pension fund – and that means repeating the five steps above. At the very least it is worth reviewing what your pension is delivering once a year.