Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “We head towards the new year with all kinds of ideas about how we are going to improve our finances. Retirement may feel like a very long way away, but it’s important not to be complacent. Taking a set and forget approach can mean your planning falls foul of various pitfalls that can have a big impact on what you end up with. Taking some simple actions now can make a huge difference that your future self will thank you for.”
Remember to claim your pension tax relief.
Pension tax relief is a hidden hero of retirement that can see a £100 contribution only cost £80 for a basic rate taxpayer. Higher and additional rate taxpayers get an even better deal with that £100 pension contribution only costing them £60 and £55 respectively. However, in some cases, you won’t receive your full amount of tax relief automatically.
Basic rate tax relief will usually be added to your contribution automatically and you won’t need to claim extra relief if your pension is set up under salary sacrifice either. However, if you are a higher or additional rate taxpayer you may need to claim the extra 20% or 25% tax relief through self-assessment.
If your pension is set up under a net pay arrangement, then the correct tax relief will be taken. However, if your pension is set up under what is known as relief at source then you will need to claim the extra tax relief via self-assessment.
This is because if your pension is a net pay arrangement your pension contribution is deducted from your salary before income tax is paid and your scheme claims back tax relief at your marginal rate of income tax.
If it is set up as relief at source, as many private pensions, such as SIPPs and some workplace pensions are, then you will need to claim the extra tax relief. This is because contributions are deducted from your salary after tax. The employer takes 80% of the contribution from the employee’s salary and then reclaims the extra 20% from HMRC. This means if you are entitled to tax relief at a higher rate then you need to claim it.
Don’t set and forget contributions.
It can be easy to set your contributions at the auto-enrolment minimum level and forget to update them. For some people this will be enough to give them what they need in retirement, but it won’t be for others and if they don’t engage, they could be in for a nasty shock. With only 38% of households on track for a moderate retirement, according to the latest data from HL’s Savings and Resilience Barometer, it’s an area that more of us should be attending to.
Taking steps, such as increasing your contributions whenever you get a pay rise, can be a relatively painless way of boosting your pension. It’s also worth seeing if your employer will increase their contribution if you increase yours. This is known as an employer match, and it can make a huge difference to how much goes into your pension.
Make the most of your allowances.
Many of us can put up to £60,000 per year into our pensions and still benefit from tax relief. For a higher rate taxpayer that means your £60,000 contribution in effect only costs you £36,000 so it is hugely tax efficient. If you have any unused allowances from the past three years you can also make use of these through a process called carry forward, which means you may be able to make a contribution of up to £200,000 to your SIPP this tax year (as long as you earn at least this amount).
If you have used up your own allowances, then you can contribute to the SIPP of a loved one to give their retirement a much-needed boost. You can contribute up to £2,880 per year to the SIPP of a non-working spouse or child and they will receive a government top up in the form of tax relief bringing the contribution to £3,600.
Find those lost pensions.
It’s easy to lose track of pensions from old employers, but not tracking them down can leave you thousands of pounds worse off. If you think a pension has gone astray then contact the government’s Pension Tracing Service. You will need either the name of your employer or pension provider and they will give you contact details so you can get in touch.
Once you’ve gathered your pensions together it might make sense to consolidate them. This could save you time, money and admin. However, before you do, make sure you aren’t incurring any expensive fees or missing out on valuable benefits such as guaranteed annuity rates.
Search the market for the best annuity.
Annuities are offering great value right now, but you need to make sure that you search the market to get the best deal for you. Quotes vary between providers and taking the first one on offer could leave you thousands of pounds worse off over the course of your retirement.
The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,281 per year from a single life level annuity with a five-year guarantee. This will be substantially higher than other providers are offering. Once an annuity is bought it can’t be unwound so it is well worth taking the time to scan the market.”
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