5 simple ways to grow your pension wealth

Published on March 2, 2022 by Andrew
A child’s hand stacking wooden blocks on top of each other

Retirement is a long-term investment intended to provide you with continued income during your life after work.

Global events can influence us all and affect worldwide economies. Remaining focused on your own plans might be difficult currently, but your long-term retirement goals are unlikely to have changed.

Keep reading for five simple ways to grow your pension wealth and keep your retirement plans on track.

1. Start early

The earlier you start saving toward your pension, the more contributions you will be able to make. A higher number of contributions will likely mean a larger pot, especially once potential investment growth and compounding are factored in.

While you might have a lower salary at the start of your career, the larger investment term means you can afford to put aside a smaller percentage of your take-home pay.

The rule of thumb states that if you take the age at which you start contributing to your pension and half it, that is the percentage of your take-home pay that should be directed toward a pension.

Say you start contributing at age 30, for example, you’d only need to pay 15% into a pension each month. Start contributing at age 50 and that amount rises to 25%.

2. Pay your future self first

Effective budgeting is the best way to make these contributions work for you, and that usually means paying your future self first.

Contribute to savings and investments as soon as you get paid and then budget with what remains.

If you receive a pay rise or a work bonus, consider directing this straight into your pension before you have the chance to miss the extra amount. If you finish paying off a loan, such as a car loan, you might continue with the payments but make them into your pension instead.

You’ll need to remember that once your money is invested in a pension it is locked in until you reach pension age. This is currently age 55 (rising to 57 from 2028), so you’ll need to be sure that you can live comfortably on the amount that remains once you’ve paid your future self each month.

3. Make full use of tax efficiencies

Pensions are incredibly tax-efficient but you’ll need to make full use of all the allowances and thresholds to get the maximum efficiency from them.

Your Annual Allowance

This is the amount you can contribute while still receiving tax relief. For the 2021/22 tax year, it stands at £40,000 (or 100% of your earnings, if lower).

Contribute up to this amount and you’ll receive tax relief at 20% on each contribution you make. You can also carry your allowance forward for up to three years so be sure to check if you have any unused allowance from previous years.

Basic-rate tax relief means that increasing the value of your pension pot by £100 will cost you just £80.

Higher- and additional-rate tax relief

Tax relief is added automatically at the basic rate of 20% but as a higher- or additional-rate taxpayer, you could be claiming back additional tax relief through your self-assessment tax return.

A higher-rate taxpayer can claim back an additional 20%. Those on the additional rate, meanwhile, can claim back an extra 25%, meaning that topping up your pension by £100 would cost just £55.

4. Make the most of your workplace pension

Your workplace pension is great for accumulating pension wealth while receiving “free” pension top-ups from your employer.

Ask your employer if they’ll match your contribution increase

Under current auto-enrolment rules for the 2021/22 tax year, the minimum contribution stands at 8%, made up of 5% from you and 3% from your employer.

Some employers, however, might be willing to match any percentage increase you make so be sure to ask.

Use salary sacrifice if your employer offers the scheme

Using salary sacrifice could be an especially good option as the National Insurance (NI) rise kicks in at the start of the 2022/23 tax year.

If your employer offers the scheme, it will allow you to effectively lower your salary for NI and Income Tax purposes by directing money straight into your pension pot. It will lower the NI payable by your employer too.

Salary sacrifice effectively lowers your salary, which could affect ongoing or future mortgage applications or detrimentally affect other benefits you receive.

5. Speak to the experts

Pensions are incredibly tax-efficient but to get the most from them you’ll want to maximise all of your available allowances and thresholds.

Your plan needs to be based on your long-term goals and we’ll make sure that it is also tax-efficient and individual to you and your circumstances. From your attitude to risk, your available Annual Allowance, and the suitability of salary sacrifice, we can make sure you’re always on track for your dream retirement.

Get in touch

Whatever aspect of your long-term retirement plans you need help with, get in touch. Email info@thepensionplanner.co.uk or call 0800 0787 182.

Please note:

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

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