JUGS of Sangria on the beach, trips around the Med – everyone dreams of a 5* retirement, but how do you actually afford it?
There are ways of adding £10,000s to your pension without sacrificing extra cash from your pay check. Top money whizzes explain how YOU can do it…
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Saving for retirement is an expensive business. You need £13,900 a year for the ‘minimum’ standard of living – roughly £1,350 more than the full state pension. If you want a ‘moderate’ lifestyle, that goes up to £32,700, according to calculations from the Pensions UK.
And as we’re living for longer and the cost of living still continues to rise, you’ll need to save more to make your cash last in your golden years.
Many of us are saving into a pension already thanks to auto-enrolment. This is where bosses sign you up to a workplace scheme automatically and payments are deducted from your wages (you get a contribution from your employer too).
But even with auto-enrolment, millions of savers are not saving enough into their pots.
However, with a few nifty tricks, you can add money to your pot without adding extra money from your salary…
1. The ‘merger’ trick to save £8,200
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It’s really common to have multiple pension pots as you’ll normally get a new one, each time you change jobs.
If you’ve got a handful of pots already, it might make sense to combine them. Not only will it make them easier to keep track of, it could also boost your retirement savings, if it reduces your charges.
Pension charges vary depending on your provider and where your money is invested. So-called default funds on workplace pensions (where your money goes if you don’t choose a specific fund) are capped at 0.75%.
Some older pensions charge 1% or more to run your pot. But it’s possible to pay 0.5% or less.
Jemma Slingo, pensions and investment specialist at Fidelity International, says it’s really important to pay attention to fees, even though their impact is hard to spot initially.
“Imagine you’re 40 and have two pension pots, both containing £30,000. One pension charges 0.6% a year in total. The other charges 0.3% a year.
“You leave both pots invested for 25 years and achieve an annual return of 6% before any fees are taken. If you kept the pots separate, you could have £231,670 by the time you retire at 65.”
“But what if you consolidate? Moving both pots to the cheaper provider would give you £239,898 by 65. In other words, consolidation could leave you with an extra £8,228 in your pension by age 65.
You must think carefully and check that you won’t lose any valuable benefits when you transfer. That’s because some schemes might let you retire early or take more tax-free cash.
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Sticking with your current provider could cost you thousands of pounds in retirement.
That’s why Pense is offering free pension advice for people with pots of all sizes – whether it’s a drawdown or annuity.
Speak to one of their specialists to get a detailed breakdown of your options.
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2. Track down your lost pots – up to £42,386
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When you get a new pension every time you change jobs, it’s easy to lose track of your pots.
Maike Currie, vice president of personal finance at PensionBee says: “PensionBee’s data highlights that there are at least 4.8 million lost pension pots in the UK, with nearly one in 10 workers believing they have misplaced a pot worth over £10,000.
“We crunched the numbers and found that leaving a pot worth just £10,000 behind at age 30 can reduce your eventual retirement nest egg by £42,386 by age 68.”
The Pensions Policy Institute says the average lost pension is worth £9,470, rising to £13,620 for people aged between 55 and 75.
To find a lost pot, it’s worth digging out old paperwork or contacting former employers. If that doesn’t work the government has a free pension tracing service.
3. Top up for pension by looking after the grandkids – up to £7,160
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To get the full state pension you need 35 years’ of national insurance contributions (NICs) – either paid for with earnings or credits from claiming certain benefits. If you have less than 35 years (but more than 10), you’ll get a reduced amount of state pension when you retire.
If you’ve got a gap in your NI record, you can often buy voluntary NICs to increase your state pension. But, Susan Hope, pensions expert at Scottish Widows says that if you help look after a grandchild under the age of 12, you could get credit for free.
This is because working parents, who are registered for child benefit but don’t need the credit, can transfer it to another family member when they help with childcare.
Susan says it costs nothing to claim. “Search ‘specified adult childcare credits’ on gov.uk and complete the form CA 9176. Both you and the parent who claimed child benefit must sign it. The best part is that claims can go all the way back to the 6th of April 2011.”
“If you’re successful and the credit does fill a gap and increases your state pension it can mean an additional £358 a year!”
Over a 20-year retirement that could make you £7,160 better off.
4. Fit and healthy? Defer your state pension – and get up to £727 more a year
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If you plan to work past state pension age and don’t need the income straightaway, you could bag yourself a higher weekly payment, by deferring.
“You don’t have to claim your State Pension as soon as you reach State Pension age,” says Maike.
The Government boosts your weekly payments by 1% for every nine weeks that you defer, she explains. On the current payment of £241.30 a week, that works out at just under £14 a week for life, or roughly £727 a year.
If you defer for a year, you could also choose to take money as a one-off lump sum, but you wouldn’t get any interest added.
Before you make a decision, it’s important to think about your health and whether you’re likely to live long enough to recoup the cash you gave up in that year.
According to Royal London, if you deferred your pension for a year, basic rate taxpayers would need to live to age 82 to benefit (compared to 79 for higher rate taxpayers).
5. Use cash back to build your pot – up to £14,000
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Cashback offers give you a little something back when you spend your money on certain things – pay that money into your pension and it could be a great way to increase your savings without feeling the pinch.
This can be really lucrative during expensive periods – like Christmas or when you’re paying for a holiday, but it can also provide you with a small but steady stream of income throughout the year.
Sarah Coles, head of personal finance at AJ Bell says: “Traditional cashback sites tend to pay when the retailer confirms the transaction, so they can be slow and unpredictable.
“However, cashback linked to cards or current accounts tend to pay monthly, so you can go into your account each time it’s paid, and move it into a pension.”
It might be logistically tricky to pay this money into a workplace pension. Instead you could start a new, simple personal pension – plenty can now be run with an app on your phone.
The Chase bank account pays 2% cashback when you spend money on groceries, petrol, rail and bus travel as well as eating out.
Sarah says if you claimed the maximum £20 a month (requiring a £1,000 spend) and paid it into your pension each month, a 30-year-old would have an extra £14,000 by the time they’re 68.
6. Pay higher rate tax? Don’t miss out on valuable tax relief
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When you pay money into a pension, you get a free top up from the government. This is called tax relief and the payment is equal to the amount of income tax you paid on that money.
It means that it only costs a basic rate taxpayer £80 to pay £100 into their pension (20% relief), while those on the higher rate pay just £60 to invest the same amount (40% relief).
But, if you pay higher rate tax and have a personal pension – like a SIPP – that you arranged yourself, only basic rate relief will be added automatically.
To claim the extra 20% you’re owed, you’ll need to go to HMRC either by using its online service or in your tax return, if you complete one.
Maike says: “For example, an English higher-rate taxpayer who puts £8,000 into a relief-at-source pension, normally has £2,000 added by HMRC, creating a £10,000 gross contribution, and may be able to claim a further £2,000 of higher-rate relief.”
You could use this money to reduce a future tax bill or get a rebate. But, if you paid it into your pension – a one-off claim worth £2,000, could grow to £4,611 over 20 years, according to PensionBee’s calculations (assuming 5% growth and 0.7% management charge).
It’s also worth noting claims can be back-dated for four years, so if you’ve been a higher rate taxpayer for a while, you could be due a bumper payment.
According to AJ Bell, around 800,000 higher rate taxpayers don’t claim the full rate of relief they’re entitled to.