Pension
Tips And Tricks To Help Maximize Your Nest Egg
Our guide
to making the most of your pension contributions.
The good
news is that thanks to improved public health, nutrition and medicine people
are living longer these days, with men living to an average age of 79 and women
83 years, according to data from the Office of National Statistics.
The bad news is that, with many of us living well into our eighties, nineties and in some cases even beyond that, we could find ourselves having to fund 30 years or more of retirement.
How can you maximise your pension income and ensure that those years are spent in comfort, enjoying life to the full, rather than living hand to mouth and worrying about bills? We look at simple ways to boost your pension pot and ensure you have as much money as possible to live on in your golden years.
Start saving as early as you can
The best way to ensure you have a decent income to rely on in retirement is to start saving as early as possible – ideally in your twenties and thirties. The earlier you can put money away, the more you can save over time and the more compound interest (interest earned on your original interest) you can generate to boost your pension pot.
Just starting your pension five years earlier could increase your final nest egg by up to 30%, say pensions experts.
Join an occupational scheme
If the company you work for offers an employee pension scheme, you’d be missing out by not joining it. Under the Government’s auto-enrolment scheme, by 2018 all companies will have to offer staff an occupational pension scheme and contribute to it.
Many firms offer generous contributions, so if you don’t join you are effectively missing out on a tax-free pay rise, as well as any tax relief from the Government you may be due.
Claim back your tax relief
If you are a basic or higher rate tax payer and regularly pay into a personal pension or occupational scheme, you should be eligible to receive pension tax relief from the Government.
HM Revenue and Customs work out how much you can receive, but typically savers receive the difference between their contributions and their pre-tax earnings.
For example, a basic rate tax payer contributing £80 a month from their salary after tax to their pension would receive 20% tax relief from the Government. This means they would get a Government top-up of £20 (20% of their pre-tax earnings of £100), bringing the total pension contribution to £100.
A higher rate tax payer, paying 40% tax on their earnings, would be eligible to receive 40% tax relief on their pension contribution, so if they contributed £60 of their post-tax earnings, they would receive a Government top-up of £40.
If yours is an occupational scheme, typically the scheme will automatically claim back the tax relief on your behalf, but if in doubt it’s worth making sure that you are receiving the tax relief you are owed as it will help boost your pension pot.
Make top-ups when you can
Making one-off additional
contributions to your nest egg as and when you can will also help maximise your
pension income. When you get a pay rise or receive a bonus, instead of
increasing your living expenditure as many people do, you could instead choose
to increase your pension contributions or make a one-off extra payment into it.
At certain times of your life, you are likely to have many other financial goals vying for your attention, such as saving for a family or a deposit on a flat.
As such, it’s a good idea to open a tax-free ISA (individual savings account) to help you save towards these goals. Opening an easy access account will give you more flexibility with your money but also mean that when you are able to, you can top up your pension from time to time with some of your ISA savings.
Keep an eye on your investments
Once you’ve set up a pension, it’s tempting to sit back, relax and forget all about it. But it’s a good idea to look over your investments regularly – say once a year – and make sure that the funds your pension is invested in are suitable for your needs.
Many occupational schemes tend to be invested in a low risk ‘default option’, which may not be the best fit for your own financial requirements.
If you are in your twenties and thirties, with 30 or 40 years before you retire, it makes sense for your money to be invested in equities funds, for example, because, over time, shares tend to outperform cash as an investment.
As you get closer to retirement, it is more sensible for your money to be in lower risk investments, such as bonds. Taking an interest in your own money and where it is invested is likely to pay dividends.
Keep National Insurance contributions up-to-date
While the new state pension might not be generous, at around £151.25 a week, every little helps so it’s worth keeping your National Insurance contributions up-to-date to ensure you that, come retirement, you qualify for it.
If you take time off to raise a family or care for sick relatives, are unemployed or ill for any length of time or decide to live abroad for a while, it’s easy to let your contributions lapse.
To qualify for the new state pension, you’ll need at least 10 qualifying years on your National Insurance Record and to receive the maximum you’ll need 35 years.
However, you may be able to buy additional years via voluntary contributions. If you claim Child Benefit, Jobseeker’s Allowance or a carer’s allowance you should also be eligible for National Insurance credits.
The bad news is that, with many of us living well into our eighties, nineties and in some cases even beyond that, we could find ourselves having to fund 30 years or more of retirement.
How can you maximise your pension income and ensure that those years are spent in comfort, enjoying life to the full, rather than living hand to mouth and worrying about bills? We look at simple ways to boost your pension pot and ensure you have as much money as possible to live on in your golden years.
Start saving as early as you can
The best way to ensure you have a decent income to rely on in retirement is to start saving as early as possible – ideally in your twenties and thirties. The earlier you can put money away, the more you can save over time and the more compound interest (interest earned on your original interest) you can generate to boost your pension pot.
Just starting your pension five years earlier could increase your final nest egg by up to 30%, say pensions experts.
Join an occupational scheme
If the company you work for offers an employee pension scheme, you’d be missing out by not joining it. Under the Government’s auto-enrolment scheme, by 2018 all companies will have to offer staff an occupational pension scheme and contribute to it.
Many firms offer generous contributions, so if you don’t join you are effectively missing out on a tax-free pay rise, as well as any tax relief from the Government you may be due.
Claim back your tax relief
If you are a basic or higher rate tax payer and regularly pay into a personal pension or occupational scheme, you should be eligible to receive pension tax relief from the Government.
HM Revenue and Customs work out how much you can receive, but typically savers receive the difference between their contributions and their pre-tax earnings.
For example, a basic rate tax payer contributing £80 a month from their salary after tax to their pension would receive 20% tax relief from the Government. This means they would get a Government top-up of £20 (20% of their pre-tax earnings of £100), bringing the total pension contribution to £100.
A higher rate tax payer, paying 40% tax on their earnings, would be eligible to receive 40% tax relief on their pension contribution, so if they contributed £60 of their post-tax earnings, they would receive a Government top-up of £40.
If yours is an occupational scheme, typically the scheme will automatically claim back the tax relief on your behalf, but if in doubt it’s worth making sure that you are receiving the tax relief you are owed as it will help boost your pension pot.
Make top-ups when you can
Making one-off additional
contributions to your nest egg as and when you can will also help maximise your
pension income. When you get a pay rise or receive a bonus, instead of
increasing your living expenditure as many people do, you could instead choose
to increase your pension contributions or make a one-off extra payment into it.
At certain times of your life, you are likely to have many other financial goals vying for your attention, such as saving for a family or a deposit on a flat.
As such, it’s a good idea to open a tax-free ISA (individual savings account) to help you save towards these goals. Opening an easy access account will give you more flexibility with your money but also mean that when you are able to, you can top up your pension from time to time with some of your ISA savings.
Keep an eye on your investments
Once you’ve set up a pension, it’s tempting to sit back, relax and forget all about it. But it’s a good idea to look over your investments regularly – say once a year – and make sure that the funds your pension is invested in are suitable for your needs.
Many occupational schemes tend to be invested in a low risk ‘default option’, which may not be the best fit for your own financial requirements.
If you are in your twenties and thirties, with 30 or 40 years before you retire, it makes sense for your money to be invested in equities funds, for example, because, over time, shares tend to outperform cash as an investment.
As you get closer to retirement, it is more sensible for your money to be in lower risk investments, such as bonds. Taking an interest in your own money and where it is invested is likely to pay dividends.
Keep National Insurance contributions up-to-date
While the new state pension might not be generous, at around £151.25 a week, every little helps so it’s worth keeping your National Insurance contributions up-to-date to ensure you that, come retirement, you qualify for it.
If you take time off to raise a family or care for sick relatives, are unemployed or ill for any length of time or decide to live abroad for a while, it’s easy to let your contributions lapse.
To qualify for the new state pension, you’ll need at least 10 qualifying years on your National Insurance Record and to receive the maximum you’ll need 35 years.
However, you may be able to buy additional years via voluntary contributions. If you claim Child Benefit, Jobseeker’s Allowance or a carer’s allowance you should also be eligible for National Insurance credits.
Delay taking your pension
Another way to maximise your pension income is to delay taking it. Continuing to contribute to it, while also giving your existing pot longer to increase in value, should mean your nest egg is hopefully bigger by the time you do retire. Check that your provider doesn’t charge penalties for doing so, however.
Also, if you decide to buy an annuity, which guarantees you a set amount of income each year for the rest of your life, the older you are the more generous the rates will be. However, under the new Government rules you no longer have to buy one.
Another way to maximise your pension income is to delay taking it. Continuing to contribute to it, while also giving your existing pot longer to increase in value, should mean your nest egg is hopefully bigger by the time you do retire. Check that your provider doesn’t charge penalties for doing so, however.
Also, if you decide to buy an annuity, which guarantees you a set amount of income each year for the rest of your life, the older you are the more generous the rates will be. However, under the new Government rules you no longer have to buy one.
Happy Investing
Source:Yahoofinance.com
No comments:
Post a Comment