If the 9-to-5 grind and dreary weather are getting you down, you might be wondering whether 2024 could be the year that you finally stop working and start realising your retirement dreams.
Before you make the leap, it’s important to make sure you’ve done all you can to get your pension in shape. After all, your pension might need to last for two or even three decades in retirement.
Here, we look at six ways to help boost your pension and increase your chances of a fun and fulfilling retirement.
1. Top up your pension savings
Your retirement might be just around the corner, but paying more money into your pension – whether that’s by increasing your monthly contributions or adding a lump sum – could still have a meaningful impact on the size of your pot.
Personal pension contributions benefit from 20% tax relief, which provides an immediate boost to your savings. For every £80 you contribute to your pension, you’ll get a top-up of £20. If you’re a higher-rate or additional-rate taxpayer, you can claim back an additional £20 or £25, respectively, via your self-assessment tax return.
If you are topping up your pension, make sure you stay within your pension annual allowance – that’s the maximum amount you can contribute to pensions each year without facing a tax charge. The annual allowance rose from £40,000 to £60,000 in April 2023, so there’s even more incentive to save towards your retirement. Bear in mind that you can only receive tax relief on up to 100% of your gross relevant earnings1 . So, if your earnings are lower than £60,000, you’ll get tax relief up to the amount you earn.
You can continue receiving tax relief right up until age 75.
2. Check where your money is invested
The run-up to retirement is a key time to ensure your pension money is invested in a way that suits your goals and attitude to risk.
As you get closer to retirement, it’s generally wise to start moving your money away from shares into bonds2, which have historically offered lower but more stable potential returns. The last thing you want is for a stock-market slump to reduce your savings just before you access them, as it’s unlikely you’ll have time to recoup losses.
On the other hand, your savings still need the opportunity to keep growing to help fund what could be a very lengthy retirement. You might therefore want to retain at least some exposure to shares. Although investments go down as well as up and you may get back less than you invested, history shows that shares have delivered higher returns than bonds and cash over the long term.
Building a balanced pension portfolio by yourself isn’t always easy, which is why at Vanguard we offer a range of options depending on your needs and preferences. If you’re a hands-on investor you can build your own portfolio within the Vanguard self-invested personal pension (SIPP) by choosing from our wide range of funds. Or you can choose one of our Target Retirement Funds, which automatically move you into less risky investments as you get closer to retirement. If you want more of a helping hand, we offer a managed pension, where we match you with investments that fit your attitude to risk, manage them every step of the way and provide expert investment guidance from real people if you need it.
3. Switch to a low-cost provider
Pension fees can vary enormously from one provider to another. Some older pensions, in particular, have excessively high fees. Some pension providers may even charge you for accessing your hard-earned savings when you retire.
Fees can have a significant impact on how long your savings last in retirement, so it’s well worth checking what you’re paying and considering switching to a low-cost provider.
Let’s imagine you had a pension worth £200,000, started drawing income of £12,000 in your first year of retirement, and then increased that income by 2% each year. If you paid annual costs of 1.5%, you’d deplete your pot after 19 years, assuming an annual investment return of 5%. But if the annual cost was 0.5%, your pension would last just over 22 years. That’s an extra three years’ income for simply reducing costs.
4. Consider consolidating your pensions
One way to potentially reduce costs is to consider consolidating your pensions. That means bringing together all your different pension plans into one pot, such as a Vanguard SIPP. By consolidating your pensions, you’ll have just one fee to pay for all your pension savings. It can also cut down on admin – you’ll have just one pension to manage – and give you a clearer idea of how much your overall pension savings are worth.
Remember, though, that it might not always be in your interests to transfer out of a pension, particularly if you have a ‘final salary’ or ‘defined benefit’ (DB) pension – or any other guarantees3. If in doubt, it is always worth seeking financial advice. It’s also a good idea to check whether your existing provider charges transfer fees. At Vanguard, we don’t charge for transfers, whether in or out of our SIPP.
5. Think about phasing your retirement
If your pension isn’t quite as big as you hoped and you’re not in a position to top it up, another option is to ‘phase’ your retirement. This is when you retire gradually by, for example, going part-time or working on a consultancy basis.
Continuing to earn some income from your job can help to alleviate the pressure on your pension savings. A phased retirement could also enable you to retain some of the enjoyment of work while still having flexibility to pursue your other interests.
Bear in mind that income from employment and income from pensions are both subject to tax, so consider working out whether pension withdrawals would push you into a higher tax bracket. Once you start drawing taxable income from your pension, you’ll also trigger the money purchase annual allowance. This limits the amount you can pay into your pensions to £10,000 each tax year (including tax relief and employer contributions).
6. Don’t forget your other savings and investments
Income in retirement doesn’t only have to come from pensions, so if you’re worried your pension isn’t big enough, it won’t necessarily mean your plans have gone out the window. If you have money in an individual savings account (ISA), for example, this could also help to fund your retirement.
In fact, drawing income from ISAs in retirement could prove tax efficient. With a pension, you can usually withdraw up to 25% tax free (capped at £268,275), whereas the remainder is taxed as income. With an ISA, withdrawals aren’t taxed at all, so taking some income from ISAs could help to reduce your tax bill in retirement.
Again, it’s important to make sure the investments in your ISA suit your goals and that you’re not overpaying on investment fees. With our low-cost ISA, you can either choose the funds that match your goals or let us do it for you through our managed ISA option.
1 For more on what counts as ‘relevant earnings’ that can earn tax relief when used to fund a pension, see the HMRC Pensions Tax Manual.
2 Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.
3 These pay a guaranteed income depending on your final or average salary and are funded by employers. In general, DB pensions are usually not suitable for consolidation and are becoming increasingly rare in the private sector.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55.
If you are not sure of the suitability or appropriateness of any investment, product or service you should consult an authorised financial adviser. Please note this may incur a charge.
Your pension transfer will be sent to us as cash. During this period you will be out of the market (not invested) so you could miss out on any increase in the value of your pension fund should the market rise.
The eligibility to invest in either ISA or Junior ISA depends on individual circumstances and all tax rules may change in future.
Vanguard Target Retirement Funds may invest in Exchange Traded Fund (ETF) shares.
ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.
Any tax reliefs referred to in this article are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.
For further information on risks please see the “Risk Factors” section of the prospectus on our website.
Vanguard Asset Management Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described, please contact your financial adviser.
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