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4 tips for a healthy pension as you approach retirement

We look at 4 tips to help you prepare your pension savings in case your health lets you down when you're close to retirement.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Our health is a priority throughout our lives, especially during our later years. Although we can do our best to stay fit and active, if our health lets us down, it's essential we prepare our finances to stay strong.

On average, both men and women born in the UK today are expected to live in good or very good health for about 63 years, highlighting the need for people to better prepare their retirement savings while they can.

If you're close to hanging up the old work boots, but are forced to take a break or retire that bit earlier due to illness, it can have a big impact.

For example, if you were to fall out of work in your early 60s, you wouldn't be able to claim the State Pension, if eligible, until at least age 66. So, it's vital to have other provisions to fall back on. Here are four tips to help you prepare.

This article isn't personal advice. If you're not sure what's right for you, please seek advice. Pension and tax rules can change, and any benefits depend on your circumstances.

Tip 1: Make the most of your pension contributions while you can

Paying as much as you can afford into your pension will put you in a better financial position if you're forced to retire earlier than you intended. You'll even get a government incentive for each payment you make.

If you're a UK resident under the age of 75, each time you add money to your pension, the government will automatically add 20%. It's a top up in the form of tax relief. So if you're a basic rate taxpayer, for every £800 you contribute the government will top it up to £1,000.

If you're a higher earner, you could benefit from up to 46% tax relief overall. On top of the 20%, you can claim back up to a further 25% (or 26% for Scottish taxpayers) through your tax return.

More on how SIPPs work

How much can I pay into a pension and receive tax relief?

You can get tax relief on personal pension contributions up to 100% of your earnings, or £3,600 if this is greater. That's if you're a low or non-earner.

Your pension contributions, including any made by your employer, are also limited by the annual allowance which is currently £40,000 each tax year for most people.

Your personal limit may be higher or lower than this depending on your circumstances. Remember, pensions are meant for retirement so you can't normally access your money until age 55, rising to 57 from 2028.

More on tax relief

Tip 2: Make the most of your employer's contribution rules

All UK companies, irrespective of their size, have to provide a pension for their eligible employees and pay into it on their behalf. How much they pay in will depend on the employer, but it must be at least 3% of any qualifying earnings.

Lots of employers also offer "pension contribution matching", meaning they'll match whatever you pay in up to a certain percentage.

Despite these clear benefits, some private sector workers aren't currently saving into their workplace pensions. They could be missing out on "free money" from their employer. Lots more are just paying in the minimum amount, rather than making the most of the potential matching options.

If you have a workplace pension, it's worth speaking to your employer about your contribution options.

Find out more about the HL SIPP

New Year's cash prize draw - win what you pay in

If you pay into your HL SIPP, you could win back up to £3,000. Total new payments made of £100 or more between 1 December 2021 and 23 February 2022 will count towards your potential cash prize. There will be 7 winners of up to £3,000 each.

See full terms

Tip 3: Learn more about enhanced annuities

An annuity is one of the only ways to get a guaranteed income in retirement, and you can buy one with all or some of your pension. Once set up, it'll continue to deliver a guaranteed income for as long as you live.

How much income you get will depend on different factors. Unlike some other insurance products, if you have, or develop, health conditions before you take one out, declaring this could actually work in your favour. You'll normally get a better deal – an enhanced annuity.

Even fairly common conditions could increase your annuity income. For example, diabetes, high blood pressure or high cholesterol are all qualifying health conditions. Your height, weight and smoking history usually have an impact too.

Once an annuity has been set up it can't normally be changed or cancelled. So make sure to disclose all these details and choose the right options at the outset.

More on enhanced annuities

Get an annuity quote

Download our free annuity guide

Before deciding what to do with your pension, we think it's best you get to grips with all your options so you can choose one that's right for your circumstances.

You should look for free, impartial pension guidance from the government's Pension Wise service. If you're still unsure about what to do, speak to a financial adviser.

Tip 4: Don't forget your unused pension allowances

This can be particularly important if you've had a large redundancy payment or if you're a high earner.

A quirky pension rule lets you take advantage of any unused allowance from the previous three tax years – it's called the carry forward rule.

The current annual allowance is £40,000 for most people. Let's say you'd used all of this year's allowance, but you hadn't used any allowance from the previous three tax years, when the allowance was also £40,000 for most people. That means you could invest up to an extra £120,000 in your pension in the current tax year.

Effectively, you'd pay in up to £96,000, with the government adding up to £24,000 in basic-rate tax relief to the pension. If you were a UK additional-rate taxpayer, you'd also be able to claim up to a further £30,000 in tax relief via your tax return.

More on pension allowances

There are two must-haves to be able to carry forward pension allowances.

  1. You've had a pension in each year you wish to carry forward from, whether or not you made a contribution. The State Pension doesn't count.
  2. You have earnings of at least the total amount you're contributing this tax year. Or if not, your employer could contribute to your pension – this is likely to be most relevant for those with their own limited companies.

Pensions carry forward calculator

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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