A recent report from Actuarial Post suggests that UK workers don’t start to “get serious” about their pension savings until at least age 36.
At this point in our lives, the report argues, most of us will have more than a decade of work under our belts and be two years beyond the UK average age for marriage and home ownership – currently 34.
That’s not to say that you can’t get serious from a younger age, or that it’s too late to start once you reach your 40s.
“Right now” is always the best time to re-examine your pension provision and contribution amounts. It can help ensure you’re maximising your income and the tax efficiencies your pensions offer.
Measuring “serious” pension engagement
Figures published by Actuarial Post propose that one measure of “serious” pension saving is the level of auto-enrolment contributions workers put aside.
Among workers under the age of 36, only around a quarter (23%) contribute more than the minimum auto-enrolment amount of 8% (with 3% coming from their employers). For those aged over 36, though, the percentage of workers paying above the minimum jumps to 35%.
The report suggests that our 30s are a time when we start to feel more confident about financial decision-making. While two-fifths (39%) of over 30s feel positive about their career, the prospect of a further three decades or more in work might be a driver for more strategic retirement planning.
Auto-enrolment contribution changes, though, are just one measure of how serious pension savers are about their future provision.
3 simple ways to get serious about your pension contributions now
1. Start early but remember it’s never too late
Your retirement will likely feel a long way off at the start of your career. But paying your future self first is an important habit to form. And the earlier you start the more solid your financial foundation in retirement will be.
As with any investment, a focus on your long-term goal is key. The sooner you start to build your retirement fund, the more time you will have to benefit from investment returns and watch the effects of compound growth build your wealth.
That said, it’s never too late to start saving.
You might find that you only get serious about your pension in your 40s, or even later. While you might need to put aside a bigger portion of your monthly income, if you start later you could find that your improved salary and higher disposable income make this manageable.
Remember too that not all your pension income will come from your pensions so the savings and investments you accumulate throughout your career can count towards your retirement fund too.
2. Maximise your contributions when you can
The best way to maximise your contributions is to pay your future self first each month and then budget with what remains. If you receive a work bonus or pay rise, try to redirect this into your pension before you have the chance to miss it.
Think about how much you might need in retirement to live the lifestyle you want and then speak to us if you think there might be a shortfall. We can help you to bridge any gap, but the further you are away from retirement, the easier this will be.
Your pension is incredibly tax-efficient, from the tax relief on contributions to the tax-free cash available on your retirement date. This date might be decades in the future and it might feel wrong to tie this money up until you reach your 50s or 60s (especially early in your career) but try to take every opportunity to increase your contributions.
You might even pay one-off lump sums into your pension, if you receive a sudden inheritance, for example.
If you have maximised your allowances – the Annual Allowance (more on which below) or your ISA Allowance – there might be other tax-efficient ways to save. Get in touch and we can help work out the best next course of action for you.
3. Factor in recent changes while remaining wary of future ones
The Annual Allowance is a cap on the pension contributions you can make while still receiving tax relief.
Relief applies automatically at the basic rate of Income Tax, meaning a £100 increase to your pension pot costs you just £80. As a higher- or additional-rate taxpayer you can claim even more relief – an extra 20% or 25% respectively – using your self-assessment tax return.
The Annual Allowance currently stands at £60,000. This allowance, though, reduces for high earners thanks to the Tapered Annual Allowance and this could reduce your tax-efficient contributions to just £10,000 (for the 2023/24 tax year).
Maxing out these allowances is a great way to get serious about your pension. Doing so has also become more attractive recently thanks to the government’s decision to abolish the Lifetime Allowance (LTA).
The LTA is the limit on pension withdrawals you can make during your lifetime without paying an additional charge. The charge is currently set to 0% and the LTA will be removed completely from April 2024.
Whether a Labour government would look to reinstate the LTA (and how this would be achieved) is still an unknown. Be sure to speak to us before you make important retirement decisions, especially if you currently hold any form of HMRC protection.
Get in touch
If you’d like help maximising your tax-efficient pension contributions, contact us with any questions you have and see how our team of dedicated professionals can help you.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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