Most people’s aim in live is to retire with a comfortable and sizeable pension pot. So they can enjoy a rewarding and fulfilling live of retirement after working for most of their lives.
But how can we achieve what may seem an impossible dream or daunting achievement for most people ?
Step no.1 – Start Early – Learn about the power of compounding
The first simple step is to get started making contributions now matter how small. Whether that is in a workplace pension where your employer will add contributions to a certain % level. (what we call free money)
Or do you set up your own pension arrangement. Whereby the UK government will add tax-relief as as incentive to save within a pension.
Pensions are considered to be a very tax-efficient vehicle as part of someone’s financial planning journey.
Most individuals start work in the early 20’s and will work for 40 years. Mostly until their mid 60’s when the may access workplace or private pension.
Which is in addition to UK stated pension, currently payable from age 66. Soon to be rising to 67 from 2026 onwards.
Quite simply the earlier you start. The better chance you have of creating a sizeable pot and having the facility to even consider retiring earlier.
Current Uk rules as per January allow an individual to access pension from age 55. But the minimum pension age to access a pension will rise to age 57 in April 2028.
Step 2 – Increase your level of contributions
Quite simply the more you contribute and invest into the tax-free pension wrapper the bigger the pot size will become. It will give you more income in retirement or larger tax-free lump sum you can take out when accessing. At present you can access 25% of the pot tax-free when accessing.
At present most workplace pensions will operate Auto Enrolment schemes as part of their legal obligation. An employee will contribute 4%, employer 3% and tax-relief of 1% will be added.
Many experts within the pension industry think we should be paying between 12% to 15% to achieve a minimum level of security in future years.
If you increase your contributions will an employer match your contribution. Or can you increase your contributions on a personal basis, this all comes down to affordability.
Your pension will grow tax-free and IHT within the pension wrapper. Whereby in the UK at present you have an annual allowance of £ 60,000 per tax year.
Or a lower amount equal to your annual salary. So if you earn £ 30,000 you can contribute that amount each tax-year.
See attached link for greater information from the Gov.uk website:
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwiUxf3DofiDAxVRZ0EAHddbBG4QFnoECBUQAQ&url=https%3A%2F%2Fwww.gov.uk%2Ftax-on-your-private-pension%2Fpension-tax-relief&usg=AOvVaw2yV_xBsJD3Kxxr2X-edfNC&opi=89978449
One thing you could do simply to build up a pot value is to increase level of contributions. As a simple example each time you receive a pay increase.
Or set a specific date, such as January being the start of each year as part of an annual review across your investments
Step 3 – Review your investments
One thing that we don’t teach in school is personal finance and how we should invest our savings or spare cash. So when it comes to investing in pensions, most people have no clear idea of how or where to invest their monthly contributions.
Most workplace pension will offer limited investment options, whereby they will offer a few select funds and the vast majority of people will simply be enrolled into a simple default fund or a certain lifestyle fund based upon their age or risk profile if they have completed one when joining that respective scheme.
There is a great saying that states “Nobody should more about your money than you” not the pension provider or a financial adviser but you.
Simple Investment or compound example:
If you were to invest £ 5,000 a year into a pension for say 30 years, it would be worth £ 350,000 if you were to attain 5% annual growth.
If you were to attain 7% growth it may be worth around £ 500,000, so some simple actions to increase your return without taking undue investment risk could increase your pension pot dramatically.
(On side point the S&P 500 the biggest stock index in the world has given an annual return of around 8% since inception)
The aim is not to take undue or unnecessary risk, but make your money work for you over the long timeframe. Remember the market will have good and bad months and so will you.
Some years your portfolio will give a positive or negative return. But remember to think long term and what you are investing in a pension in the first place.
Most people would be better picking a simple tracker fund or ETF which will track the market. Rather than constantly changing fund sand investments to follow the latest investment fad for fear of FOMO.
Most active managers will fail to beat their benchmarks, so keep your investments simple. But become actively involved and review on a half yearly or annual basis to see how your portfolio is performing.
Step 4 – Reduce fees & charges
The amount of annual and monthly fees and charges your pension provider, will apply will greatly effect how much your pot size will be at a later date. These charges being 2 main components, fund manager fees or platform provider fees and these may vary greatly. Sometimes they will be grouped together unknowingly especially with workplace pensions.
Stakeholder or workplace pensions are now capped to annual management fees of 0.75% Whereas older schemes were capped at 1.5% a year for the 1st ten years then 1% each year after that.
If you have several schemes as a result of moving employment, it may be worthwhile to review current and existing fees as some kind of comparison.
This may prove to very cost effective if you have a small pot as if it is left untouched. Could they scheme be eaten away and eroded by fees and ongoing charges.
These annual fees and management charges may appear small each year but if compounded over several decades if will have a dramatic effect on the future pot valuation.
So have a look at your latest annual pension statement to give you an idea of how your pension has performed and what fees have been charges and taken by your provider and can they justify them so called fees.
This is especially significant if you are paying expensive fees and your pension pot may be dropping in value each year, which is a double whammy.
Step 5 – Think long term, about why you have a pension !
Most people have a private or workplace pension, to supplement the UK state pension. The current state pension due at 66 is worth £ 221.20 per week or £ 11,540 per year.
Most people can simply not survive on this amount, and this is only achievable if you have contributions 35 years National Insurance.
Hence the reason why we contribute to a private or personal pension. Think of your pensions as the 2nd biggest asset you will have after your main property or household residence. Take an interest in it and think long term, it may seem many years down the road before you access.
Start getting involved with your pension, nobody should care more about it THAN YOU
Then review on an annual basis at least to see if you are on track for a decent level of retirement.
Remember that your assets within the pension wrapper will grow tax-free and Inheritance Tax free and all profits made will be free from capital gains tax.
So it can simplify future planning as it saves on the need to complete tax returns or self-assessment forms for the vast majority of people
Be aware the state pension age is being increased from 66 to 67, between 2026 and 2028 dependant on your date of birth !
Check you state pension age and entitlement at gov.uk.http://www.gov.uk/check-state-pension, or contact them on 0800 731 0175.
Take advantage of the tools and information of offer from your provider, thanks to technology the love of information providers give you, can help massively.
For some people it may be too much information, but look at illustrations about the potential pot value in say 10 or 20 years.
Most providers will have tools and calculators to help to you to show what income levels are attainable in future. Say through buying an Annuity of via Flexible Access Drawdown.
On final point to consider is how long people remain retired for, let’s say someone retiring now in their mid 60’s is expected to live to their mid 80’s so a pension pot may last you 20 years.
Remember !
It’s not a get rich quick journey, but you will get there in the end if you create a action plan and think long term.
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