Over the last couple of weeks in this blog I’ve been exploring how to calculate how much you need to retire, and whether you may need to trim your living expenses now so you can afford a comfortable retirement later.
But what if you still have a shortfall in your projected retirement income? What else can you do to fil the gap?
Retirement Income – Boosting Your Pension Savings
The cost of filling a shortfall in your projected retirement income depends largely on your age. The further away from retirement you are the more time you have to boost your pension savings, and the more time your savings have to grow.
Use the Money Advice Service Pension calculator to estimate the monthly savings you’ll need to contribute in order to generate a comfortable retirement income.
Your Pension Savings Options
Once you’ve worked out how much extra you need to contribute to your pension savings each month, you have a number of options. We’d suggest considering the following, in this order.
If you’re employed and haven’t joined a pension scheme offered by your employer, ask for details about it. Many employers contribute to the schemes they offer and by 2018 all employers will have to offer a pension they contribute to (for all eligible workers). If this applies to you, it will make it easier to fill your retirement-income gap.
If you’re already a member of a workplace scheme, boosting your contributions to it may be the most convenient option for you. But you should compare any fees and charges against personal pensions you could use as an alternative.
You can set up your own personal pension plan. The options here include stakeholder plans (which typically have low charges) and SIPPs (which are highly flexible but tend only to be suitable for large funds and for people who are experienced in investing).
Ways To Boost Your Pension In The Run-Up To Retirement
Even if retirement isn’t far away, there are steps you can take to increase your retirement income. This applies both to your State Pension entitlement as well as to any personal or workplace pension pots that you have. Read on to find out what you can do.
Pay In More and / or Defer
You still might have time to boost your pension in which case you have two main options:
- Top up your retirement pot, whether by adding to an existing scheme or starting an additional one.
- Delay the date on which you’ll start taking your retirement income.
It’s very risky to try to boost your pension pot by investing in higher-growth investments in the run-up to retirement. If the investments fall in value, there may not be time for them to recover before you retire.
Increasing Workplace Or Personal Pension Contributions
Maximising your pension contributions in the years before retirement brings an immediate boost in the form of tax relief. This is particularly true if you are a higher-rate taxpayer, as the following example illustrates:
A higher-rate taxpayer contributes £80 into her pension.
The government, in the form of tax relief, adds £20, boosting the overall contribution to £100. The taxpayer can also claim a further £20 of higher-rate relief through her tax return, effectively reducing the overall cost to her of the £100 gross contribution to just £60.
There is a limit on the contributions you can pay into your pensions each year that qualify for tax relief. Click this link for more information.
Delaying Your Workplace Or Personal Pension
Delaying when you will start taking your retirement income could boost your pension in a number of ways.
It allows more time for you to contribute to your pension pot and more time for it to potentially grow – so you may have accumulated more savings by the time you retire. However, you may need to think about changing the way it’s invested to reduce your exposure to any potential fall in your investments.
Annuity rates also increase as you grow older. So if you are considering using your pension pot to buy an annuity, delaying may mean you will receive a higher income, subject to overall annuity rates not falling.
If you’re thinking about delaying taking your pension, check with your provider whether there will be any charges for changing your retirement date.
Maximising Your State Pension Income
If you reach State Pension age on or after 6 April 2016 you need to have completed at least 35 qualifying years of National Insurance contributions to get the full basic new State Pension (£151.25 per week, the current State Pension is £115.95 a week).
These contributions can be a mix of those you have actually paid and others you are treated as having paid, for example, during periods when you were bringing up young children or unable to work because of health problems.
If you have fewer qualifying years, then your pension entitlement will be proportionately lower. For example, if you have 20 years of National Insurance contributions, then you’d be entitled to two thirds of the full pension.
Because working lives tend to be 40–50 years or so, most people will meet the 30-year condition. But if you don’t, you may be able to fill in some gaps in your National Insurance record by making voluntary contributions now.
Missing National Insurance Contributions
If you’re not sure whether you’re on track to have made the National Insurance contributions needed to get the full basic State Pension, you can request a State Pension statement which may help you decide.
You can find details about how to get a new State Pension statement on the GOV.UK website.
Voluntary National Insurance Contribution Rates For 2015-16
If you want to increase your National Insurance record, normally you must make the top-up payment within six years of missing the original payment. There are some exceptions when you can buy years further back. The cost for each ‘missing year’ will depend on your circumstances.
Find out more about voluntary National Insurance contributions on the GOV.UK website.
State Pension Top-Up Scheme From October 2015
A new scheme called State Pension top up will be available from October 2015 to 5 April 2017 to anyone who reaches State Pension Age before 6 April 2016 and is entitled to the State Pension. It will allow people to buy up to £25 a week of additional State Pension. Follow the links below to find out more.
Find out more about State Pension top up on the GOV.UK website.
Use the State Pension top up calculator on the GOV.UK website.
If You Reach State Pension Age On Or After 6 April 2016
The government is introducing the new State Pension scheme from 6 April 2016 which has different National Insurance eligibility requirements. If you’re within 10 years of State Pension age you can apply for a personalised new State Pension statement to see how much new State Pension you may get based upon your National Insurance record. This statement will help you understand if you have any missing National Insurance contributions.
You can find details about how to get a new State Pension statement on the GOV.UK website.
Find out more about the new State Pension on the GOV.UK website.
Find out how to pay voluntary National Insurance contributions on the GOV.UK website.
Deferring The State Pension
Delaying the date you start taking the State Pension can make a big difference to the level of pension you’ll get. The rules for people who reach State Pension age before 6 April 2016 are that for every five weeks you delay taking the pension, it increases by 1%. This means that if you defer for at least a year, you’ll get a 10.4% boost to your pension. For those who reach State Pension age after 6 April 2016, the new State Pension rules will apply which means you’ll receive an increase of around 5.8% by delaying for at least a year.
If you would like to discuss any of the above, please get in contact. You can leave a comment below or get in touch directly.
