3 Easy Tips To Boost Your Retirement ‘Pot’.
Retirement age is reaching 66 years old for men and women as of October 2020, increasing to 67 between 2026 and 2028 (also known as state pension age). With the average UK resident living until they are 85, couple those figures together, this leaves us having to generate an income for 20 years after we stop working.
That’s half your working life and one of the many reasons there are a lot of current concerns with how little the younger generations are currently saving.
By the time you retire, you will have some predictable costs, clearing debt, travel, funds for care, all whilst having what we call a ‘rainy day fund’ also known as enough cash within your current account to pay for any potential broken boilers. After these have been taken into account, hopefully, you’ll still have a nice pension pot that will pay for a comfortable retirement income.
Some of you may be thinking there’s nothing to worry about because the state pension will cover me…
Firstly, you now have to claim the new state pension upon reaching state pension age. Secondly, make sure by state pension age you have contributed 30 years worth of National Insurance credits to entitle you to the full state pension.
And thirdly, even the International Monetary Fund is warning that the state pension is looking less and less likely to give a confident safety net, as it has with previous generations.
Basically, the bigger your pension pot, the larger your retirement income, and the greater your financial freedom in your later years.
Let’s look at ways to boost that pension;
Save more with Personal Pension tax top-ups;
- If you’re a basic rate taxpayer, for every 80p you invest into your pension you’ll get a 20p top-up from the government turning it into a tidy £1.
- Higher rate taxpayers can turn every 60p into £1 with the same method, but you’ll need to have your accountant send off for the correct information first.
- As well as the top up, your pension fund will enjoy tax-free growth within the wrapper (Pensions are a form of wrapper)
- Even on the way out of your pension fund you receive the first 25% completely tax-free
These 4 points make the pension investments fairly hard to match when approaching retirement and with the minimum age to access your pension fund being 55, as you get older, the ‘un-touchable’ lock-in you usually consider with looking at investing within a pension may become less important.
Pre Tax Salary Sacrifice;
Many employers offer this to their staff, so what is it?
You agree with your employer to automatically add some of your salary straight into your pension pot each month. This saves the National Insurance and Income Tax payments on the agreed amount and directs it into your (now growing) pension pot. In a nutshell, pre-tax benefits at post-tax costs.
To increase this contribution even more, ask your employer what they will be doing with the National Insurance saving they’ll be making on your new salary sacrifice, you may be able to convince to split that saving with you adding even more into your retirement fund.
Retire at a later date;
Retirement age is from 55, with state pension accessible from 65 and gradually increasing as mentioned earlier, but why work longer than you have to?
Your assets will have longer to grow. Ever heard of the compounding effect? If you have listened to Warren Buffet for a few minutes, you will have!
Every year you leave your pot, is another year your investment potentially makes a gain, meaning the following year your investment makes a bigger gain because of last years gain.
Put it this way, if you start with a pot of £10,000 with a monthly contribution of £100 pounds, in 30 years time at a conservative 6% interest a year, your pot will have £155,000 inside.
Leave that same pot for a further 10 years and it will have almost double to £295,000!
If you can put off tampering with your pension pot, do so, and take advantage of that glorious compounding effect.
Your children’s future;
… Or grandchildren for that matter. There is a secret forth tip when thinking about pensions however, it has nothing to do with your own pension. You can open a pension for each one of your children (up to the age of 18) and receive 25% bonus from the government up to the first £2,880, meaning the pot automatically grows to £3,600. That’s amazing! Combine that with the compounding effect we discussed earlier and the issue of not enough younger people saving for their future. What a great way, in a tax efficient manner, to enhance your children’s pensions and ensure that it can’t be spent on novelties of youth.
There we have it, 3ish simple ways you can boost your retirement funds. Everyone is different, if you have further questions, feel free to contact me at Adam@coldreywm.co.uk and I’ll be happy to help in any way I can.