30 July 2015
Stuck on an overcrowded train to work at 6am, with your neighbour's umbrella dripping on your newspaper, do you ever think 'I can't wait to stop working?' Do you ever daydream about lie-ins, long holidays and neglected hobbies?
But transforming that dream into reality doesn't come cheap, so how could you afford it? Once you have paid off your debts, like it or not, the answer is likely to depend on what shape your pension is in.
Here are eight tips to whip your pension into shape:
1. Claim your share of the £35 billion the taxman gives pension savers
Did you know that when you put money in a personal pension the taxman chips in too?
Say you pay in £1,000. The taxman automatically adds another £250, so you end up with £1,250 in your pension.
If you pay 40% or 45% rate tax, you get an even better deal.
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.
You can claim back extra money through your tax return. This means £1,250 in your pension could cost you as little as £687.50.
Practically everyone under age 75 can benefit.
We usually only see the taxman's money-grabbing hand. Tax relief on pensions is one of those rare occasions when his generous hand gets an outing. Why miss it?
The amount you get from the taxman depends on your circumstances and tax rules can change. Do you want to see how much is up for grabs? Your Free Guide to Pension Tax Relief explains how much tax relief you could benefit from.
2. Start a pension - the earlier the better
It sounds obvious, but the obvious is often overlooked. Indeed almost four in ten British adults don't have a pension, including 1.4 million who are within a decade of retiring.
How much should you save?
It is generally assumed that to retire at 65 you'll need about 2/3rds of your salary. Roughly speaking, to find the 'magic number' - how much you should put away every month - divide your age when you start saving by two and contribute this as a percentage of your earnings. For example, if you're 30 you should aim to save 15% of earnings. To retire at 55 you'll need to save more. The earlier you start, the less it should cost you to build a decent pension.
Do you have the best pension for you?
If you find your current arrangement lacking you may want to consider a pension that gives you the tools you need.
The Vantage SIPP (Self Invested Personal Pension) is a type of personal pension that lets you choose your own investments and gives you freedom and flexibility.
3. If they offer you a pension at work, take it!
Companies, especially the large ones, usually offer workplace pensions. In many cases, they can also pay money into your pension. The good news is a new rule – auto-enrolment – came into effect in 2012. In the next few years all UK companies, from a one-man band to a large corporate, will have to offer a pension to their employees. If you opt out, you could be missing out on 'free money'. But remember: your employer's contributions are just a helping hand - you will need to add your own to retire early.
4. Check where your pension is invested
Do you ever check the value of your home - even if you have no intention of selling it? It's perfectly natural; your home is one of your largest assets, just like your pension. Yet, do you check the value of your pension as often? Ever? Do you know where it's invested? Alarmingly, nearly half of Britons have no idea.
What difference does a good fund make?
The difference can be significant - and make a difference to how early you can retire.
Why is it important to know where your pension is invested?
Quite simply, because you could miss out if you didn't. Not all investments are the same and the difference could have a significant impact on your pension. That said, all investments go up and down so you may end up with less than you invested.
To illustrate, look at the graph below. The blue line shows the performance of one of the UK's most popular managed funds of the last 20 years, which is an investment choice for some pensions.
While the difference in performance may look slight it adds up over time - in this case the investor choosing the better performing fund would add up to a pension one third larger.
The grey line shows the average performance of the funds pensions are likely to be invested in. When you look at the graph, please bear in mind great returns in the past do not mean the same will happen in the future.
As the graph shows, all investments fall in value as well as rise, and please remember past performance is not a guide to future returns.
Source: Lipper 1 December 2014. The graph shows the performance of M&G Recovery Fund (Accumulation Units) and the ABI UK - Mixed Investment 40%-85% Shares (Pension).
Please note: some pensions restrict your investment choice. This Free guide to SIPPs tells you how you could entrust your money to some of the UK's best fund managers.
5. Make small, regular increases - they could go a long way
Would you really miss £7.50 a month? That's less than you'd pay for a take-away but it could go a really long way if in your pension.
Look at this example. John is 30 and contributes £150 net to his pension every month. If every year he increases that amount by just 5% (£7.50 a month for the first year), at age 65 he could find himself with an extra £190,642 in his pension, assuming John gets basic tax relief and the fund grows 4% a year after charges.
Never mind takeaways: this should pay for quite a few fine dining meals!
How much more could you get if you increased your contributions by just 5% every year?
Of course, these are just projections; the actual return could be less or more than this. The figures show the values in today's terms, without considering inflation, which will reduce the spending power of money over time. Moreover, investments are not guaranteed: they can go down as well as up in value so you could end up with less than you invested and the tax relief mentioned depends on individual circumstances, reflects today's tax rules and may change in the future.
If you're thinking of topping up your pension, please note: there are rules and restrictions to how much you can contribute, per year and over a lifetime. If you're unsure, please ask your pension provider.
Want to know more? This free guide gives 10 practical tips to improve your pension
6. Track down old pensions
Few people stay with the same employer for life - the average is 11 jobs in a lifetime. And even fewer people keep track of all the pension schemes they have joined during their career. Some estimate the total of unclaimed pensions is in the scale of billions.
If you remember joining more than one pension but don't have the details to hand, you can trace them for free with the Pension Tracing Service.
7. Approaching retirement? Make sure you know about the new options
Retirement rules changed on 6 April 2015. If you are at least 55, you will have a lot more freedom and flexibility over how you draw your private pensions – you can take lump sums (single or periodical), income (secure or flexible), or a combination. It will even be possible to take your whole pension fund as cash in one go.
The first 25% you withdraw is usually tax free, and the rest will be taxed as income.
Choosing how to draw your pension is one of the most important financial decisions you will have to make. You may have to depend on it for 20, 30 or even 40 years. Before you choose how to take your pension, it might pay to find out about the new rules and opportunities.
8. Act whilst time is on your side
It's all very well to dream about kissing good-bye to the daily grind in good time, but the reality can be very different.
Over a third of non-retired adults don't know when they will retire. Even worse, 3.5 million people have no plans to stop working at all!
What you do today could make all the difference between standing in that overcrowded train to work until your late years or relaxing in the sunshine on a 2-month holiday!
FREE resources that could help you retire at 55:
Free pension calculator - see if you are on track
Free guide to SIPPs: how to entrust your money to some of the UK's best fund managers