Could you create a million-pound pension?
It might be easier than you think, with some clever saving and investment habits!
Pensions are one of the best ways to save for retirement. Money placed into UK pensions are subject to tax relief on contributions, up to £40,000 a year (this varies slightly, depending on your circumstances and whether you are subject to the MMPA/Money Purchase Annual Allowance). This tax relief can allow you to make the most of your earnings.
Below are a few other tips that can help you make the most of your savings towards retirement.
1 Don’t waste time
Start paying into your pension as soon as you can. Pay as much as you can afford. If you start saving £300 a month at age 25, your pension at age 68 could be double the amount than if you start saving at age 35, depending on how your investments perform.
2 Start compound investing
This is a long-term investment trick that works well with pensions. It involves taking any investment returns and reinvesting them. This creates a snowball effect with your money that can help you reach that seven-figure pension. Typically, most pensions will operate on an accumulation basis, as opposed to dividend paying. Meaning that any growth is automatically reinvested.
3 Increase your payments
Review your pensions every year. As your income rises over time, increase your payments. You might also choose to do this as you pay off debts. If you start paying £300 a month at age 30 and increase this amount by 3% every year, you could potentially have a million-pound retirement fund. This also ensures that you try to keep up with inflation.
4 Maximise employer contributions
Find out what your maximum employer contributions are. The amount will depend on your individual employer – some will pay the minimum 3% of earnings, while others offer employee matching. This means they will pay the same amount you pay in, doubling your investment.
5 Add lump sums
If you suddenly come into a large amount of money, it is a great idea to add some to your pension. For example, if you have an inheritance or lottery win. If you have an unused allowance from previous years, you might be able to pay more than £40,000.
6 Take charge of your investments
Make sure your investment strategy matches your needs. Most people can typically afford to take more investment risk in their younger years which can help you achieve higher rates of return. Equally it is true that you will likely want to adopt a less risky approach in your older/retirement years. So, the opportunity for investment growth at this stage will likely be less.
Planning a career break or some parental leave? Even a short period of time without pension investments can impact your pot. If you can keep paying into your pension, you’ll continue to benefit from the tax relief and increase your retirement fund.
7 Don’t dip into your pension if you don’t need to
When you turn 55 (57 from 2028), you can take 25% of your pension tax-free. Some people choose to take this to pay off a mortgage or other expenses. There is no maximum age to access your pension,
Don’t exceed your lifetime allowance
The current lifetime allowance is £1,073,100. This is the maximum amount you can place into a pension before triggering extra LTA tax. If you are concerned that you may exceed the lifetime allowance, there are some protection mechanisms available to increase your personal LTA further. So, you may want to see if you can apply for Lifetime Allowance Protection, to increase this amount.
8 Consolidate your pensions
Consolidating your pensions is a great way to facilitate ease of management and simplification in the drawdown phase. Putting them in one place makes it easier to keep track. Check your paperwork and contact old employers if you think you might have misplaced any. You can also use this free government tool: https://www.gov.uk/find-pension-contact-details
If you need any help with maximising your pension potential, get in touch and let us see what we can do!
It is always a good idea to talk to an expert before making any financial decisions.
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