Many of those approaching retirement may feel rather disappointed. They may have made sacrifices to build their pension pot, only to find that a large lump sum means a worryingly small income.
What seemed like a good income when they started pension planning forty years ago looks less generous now and the situation is made worse by low annuity rates. The record low bank rates mean that cash cannot generate interest at the 10% or even 15% achievable then. Annuity rates may be starting to pick up, but many people still need more from of their nest egg to enjoy the retirement they want.
At Continuum we are looking at what you can do to boost your pension income – and the good news is that there are several possibilities.
Even if retirement is close, there are steps you can take to increase your retirement income. This applies both to your State Pension as well as to any personal or workplace pension pots that you have built up over the years.
Pay in more
The most obvious way to boost pension income is by boosting your pension pot. More money in your pot means more income can be generated from it.
Upping your pension contributions in the years leading up to retirement can be very astute, because it brings an immediate wealth increase in the form of tax relief.
So, for the tax year 2021/2022 if you are a standard rate taxpayer and put £80 into your pension, the taxman makes it £100,
If you are a higher rate taxpayer and put £80 into your pension, you get an immediate tax relief at the basic rate of 20% and can then claim a further £20 higher-rate relief through your tax return. Your £100 pension boost costs you just £60.
Figures will be slightly different in Scotland.
There is a limit on the contributions you can pay into your pensions each year. This is the amount you actually earn, or £40,000, whichever is the lowest.
You can put £40,000 a year including the tax relief into your pension (for this current tax year). If you can’t sacrifice so much from your pay packet, it could be worth using your savings. They might work much harder in your pension than it will in a savings account.
Delay claiming your pension
Delaying taking your pension allows more time to contribute to your pension pot and more time for it to potentially grow.
Delaying by a year means another year’s pension contributions, and another year for your pot to (hopefully) build.
Check your State Pension
You need at least 35 qualifying years of National Insurance contributions for the full new State Pension of £179.60 per week from 06 April 2021.
If you have gaps in your contributions, as many people do if they took a break to raise a family, you may be able to fill them with voluntary contributions. The cost for each missing year will depend on your circumstances and expert advice will be essential.
Of course, you may not have any cash to spare but there is another solution. Delaying the date you start taking the State Pension can make a big difference. Your State Pension will increase by 1% for every nine weeks you defer taking it, which is about 5.8% for every full year you carry on working.
Look at drawdown
Traditionally most pensioners have taken an annuity for their retirement income. This provides a guaranteed income for life, but the level of income you enjoy will be restricted by the size of your pension pot.
There is an alternative. Keep your pension invested and draw down an income from it. Your pot can grow free from UK income and capital gains tax, while your income can be varied to stay within the basic rate tax or even nil-rate threshold for the year.
There could be problems with drawdown. Your income is not secure. The income and value of the fund can fall, and, in the worst cases, your cash pot could run out. You need expert advice.
For help with your pension, call us at Continuum. We have the answers you need and can help you make your pension work harder.
At Continuum, our pension experts can help you find the answer to all your pension questions. Whether it is planning ahead and working out the best ways to make your pension pot larger or looking for ways – like drawdown – to make the most of what you have, we are ready to help.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.
A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.