Like so many things in life, there’s plenty about pensions that no one tells you. You might end up finding out too late or even not at all, writes Becky O’Connor, head of pensions and savings at Interactive Investor.
Trying to get to grips with pensions by yourself can feel like learning a language without a teacher.
But some of these tips and tricks, which are not common knowledge, could help your retirement prospects.
Pension insider: Our expert reveals tips which are not common knowledge
They won’t all apply to you, as their usefulness depends on your stage in work and life, but some are bound to be worth putting on your January to-do list.
And of course, if you don’t have a pension at all then starting one should come right at the top of the list for you.
1. Have you been lucky enough to get a bonus or inheritance?
Don’t forget you can use ‘carry forward’ to contribute more than your annual allowance to a pension in a year, up to the amount of any unused allowance from the previous three years.
The annual pension allowance is £40,000 or up to your annual earnings, whichever is lower. So being able to potentially fill up your allowance for three years is a really nifty way of getting the most possible tax relief on your pension, particularly if you are approaching the age you can access your pension.
The Government has more on how to do this here.
2. Are you maxing out your employer contributions?
Check as you may not be getting the most out of your workplace offer. Some employers will match or even double-match your contributions beyond the 8 per cent auto-enrolment minimum – sometimes significantly more.
It’s a good idea, if you can manage the extra and it is on offer, to effectively double up on what you put into your pension through employer matching up to the maximum – it’s free money from your employer that will be waiting for you when you retire.
If you don’t earn enough to be auto-enrolled (£10,000 is the threshold earnings for auto-enrolment), you can still opt in voluntarily to a pension scheme – contact your HR department to ask for this and to find out what level of matching is available.
Becky O’Connor: Some employers will match or even double-match your contributions beyond the 8 per cent auto-enrolment minimum
3. Will your employer pay contributions into a Sipp instead of your workplace scheme?
Some employers will now pay workplace pension contributions into a personal pension of an employee’s choice.
So, if you have always wanted to build your own investment portfolio but felt constrained by having to stay with your workplace scheme, it could be time to ask your HR department if this is an option.
There’s nothing stopping you moving old workplace schemes to a Self-Invested Personal Pension (Sipp) in the meantime, provided there are no restrictions in place, but when it comes to your current one you really want to keep your valuable employer contributions.
4. If you have a Sipp, consider setting up regular investing
This way, your contribution will be automatically split between a range of investments designated by you and in the proportions you choose, so you don’t have to go in and manually choose your investment allocation every time you make a contribution.
Setting up regular investing can help minimise the risk that your contribution is sitting in cash for longer than necessary and is being put to work in the market.
5. Don’t forget to claim higher or additional rate pension tax relief
You can do this via your tax return if you are paying into a personal pension. Basic rate tax relief is added automatically for you, but you’ll have to claim the rest back yourself via your self-assessment tax return.
So, if you earn £60,000 and want to contribute £10,000 into your pension one year, £2,000 of that will be basic rate relief and then the remaining £2,000 you are entitled to will have to be claimed back from HMRC directly through your return.
You’ll need to do this by January 31 2022 for relief being claimed for the previous 2020/2021 tax year.
How does salary sacrifice work?
Arrangements like this are a nice little earner for many workers and their employers. Find out more here.
6. Get the most out of salary sacrifice
If you are approaching the next tax bracket and make pension contributions via salary sacrifice, upping your pension contribution can mean you don’t end up paying the extra income tax.
For example, the higher rate tax threshold is £50,270. If you get a pay rise from £50,000 to £53,000, you’d have to pay 40 per cent income tax on the £2,730 above the threshold.
If you put your pay rise into your pension, you don’t pay higher rate income tax now. This tip could come in handy with tax thresholds frozen but wages rising, dragging more people over the thresholds.
7. Avoid a tax grab when you first access your pension
For those starting drawdown at retirement, there is a way to avoid being put on a scary emergency tax code and paying an unnecessarily large amount of tax on your first bit of income.
HMRC has not yet figured out a way to avoid clobbering people in this way on their first withdrawal, which forces them to reclaim the overpaid tax and causes delays to them accessing their cash.
A better way around it is to take a small initial sum when you start accessing your pension of, say, £100, to avoid a tax bill on the whole amount you want to take out.
What should you do if HMRC makes an ’emergency’ tax raid on your pension cash?
Our pensions columnist Steve Webb explains here.
Your second withdrawal can then be for the amount of income you require and this should be taxed at the correct rate.
If you do end up paying emergency tax, call HMRC as soon as you can to get a refund.
8. Is your pension beating inflation?
Inflation is running extraordinarily high at the moment at 5.1 per cent, so there’s a chance that returns on your pension are not, in fact, beating inflation right now.
The goal is real returns, not just returns. But don’t panic – it’s something to keep an eye on but not necessarily act on as pensions are long term investments that should beat inflation over several decades.
If your pension fund performance consistently fails to beat inflation, that might be a sign that your risk level needs a review and you may need a higher proportion of equities in your portfolio to get back on top of price rises.
However, that’s not guaranteed and returns from equities can fall at any time, too, or fail to rise as much as inflation.
9. When you are young, it makes sense to opt for higher growth funds
Many young people choose low risk funds for their work pension, but these are unlikely to grow as much and may not even beat inflation.
Check what risk strategy your current pension is following and if you are 10 years or so from retirement and it is low risk, consider choosing the medium or even higher growth strategies instead.
Any dips in the stock market should have enough chance to recover and for you to end up in pocket.
Investment growth: Are you taking the right level of risk for the outcome you want in retirement?
10. Even if you are approaching or in retirement, your risk level could be too low
It depends when you need the money. With drawdown, you can leave money you don’t intend to take out of your pension for a decade or more invested in a higher proportion of equities, if you wish.
The old guidance to de-risk and move into cash as you approach retirement no longer universally applies, although it might if you are planning on buying an annuity or accessing all of your cash early on in retirement.
So, older investors should also re-evaluate their risk levels and check they haven’t de-risked too soon.
11. Make sure you don’t have more than you need in cash savings
Inflation is running high and interest rates remain low despite the recent small rise to 0.25 per cent.
If you don’t need some of the money you have in savings for emergencies or for several years down the line, a more productive home for that money is likely to be a pension or an Isa.
What is the MPAA?
One in four savers dipping into their pensions are also still paying in too and risk a shock tax bill – find out how to dodge this trap here.
If you’re already drawing an income from your pension, you can continue to pay in, as long as your contributions don’t exceed the ‘money purchase annual allowance’ (MPAA) of £4,000, which is the limit for those who have already started taking an income.
12. Check whether your current pension fund is in sustainable investments
If it isn’t and you would like it to be, check whether there is a sustainable investment option on offer.
If there isn’t, feel free to write to your pension provider to register your demand for one.
In the meantime, you can create your own sustainable pension portfolio with a Sipp, which allows you to invest in sustainable funds, trusts and ETFs, to align your pension with the goal to limit global temperature rises.
13. Pay into Sipps for children and grandchildren
The Bank of Mum and Dad is surprisingly versatile and can fund pensions as well as property.
If you want to make a big difference to the future financial security of your loved ones, then payments into Sipps can be a wonderful gift.
If they aren’t earning yet, the contributions will receive basic rate tax relief and up to £3,600 a year can be paid in.
But if your adult children happen to be higher rate taxpayers and you are a basic rate taxpayer, the contribution will receive tax relief at their marginal tax rate rather than yours, so your money is going further than it would if you were paying into your own pension.
Pension age move from 55 could disrupt early retirement plans
Many fortysomethings are in the dark about the change. Find out what to do if you are affected here.
You need the account number and name of the account holder, plus the relevant form to pay in with.
14. Could you retire early?
Why not find out if this aspirational goal could possibly be within your reach. If it is, consider ploughing some of your retirement money into Isas, too.
Isas are the secret to early retirement, because you can access these before your ‘normal minimum pension age’ (NMPA) and income from them is tax-free. There’s a £20,000 a year Isa allowance.
The minimum age for accessing work and personal retirement savings will rise from 55 to 57 in 2028, so take that into account.
15. Talk to your partner about their pension
The couple that plans together, parties in retirement together. What’s in your partner’s pot? How will you plan your joint finances when you are retired and potentially drawing an income from different sources?
Have you got joint plans for different pots? What are your joint priorities for retirement? Travel? Leaving a big inheritance? An open dialogue between couples can make managing retirement finances much easier.
16. Do you need to draw a fixed income or can you vary pension withdrawals?
Many people on fixed incomes will struggle with rising living costs this year.
What is pound cost ravaging?
Find out ways to dodge this nasty trap here, including halting or varying withdrawals.
If you are drawing an income from your pension and are considering withdrawing more than usual to cope with rising living costs, check whether your new withdrawal rate is sustainable.
If not, consider reverting back to a lower amount if and when costs ease up a bit.
You don’t need to keep withdrawing the same amount from your pension every year and many people need less as they get older.
17. Want financial advice but baulk at the cost?
There is the option to take tax-free payments out of your pension to cover the cost of advice, through something called ‘the pension advice allowance’.
The tax-free amount is up to £500 a session, it’s available at any age and you can use it three times in your lifetime but only once per tax year.
The £500 will not be taxed on withdrawal from the pension pot, regardless of your income.
18. Are you over 50 and want free pension help?
If you are approaching the age at which you can access your pension and are confused by the complicated array of options available to you, book an appointment with Pension Wise.
It’s a very useful free service from the Government for over-50s and it will get you past ‘Go’ with your planning.
19. Are you eligible for pension credit?
If you are on a low income in retirement, check whether you are entitled to pension credit. If you are, your income could be topped up to a more liveable amount.
Could you claim pension credit?
Are you one of nearly 1m eligible pensioners not claiming credits worth thousands of pounds a year? Find out more here.
You can be in receipt of some state pension and even have some savings and still apply. The Government has more details here. https://www.gov.uk/pension-credit
20. Fill out your ‘expression of wishes’ form for your employer
This will make sure your pension goes to the right people or charities when you die. Also remember to update expression of wishes forms for old pensions.
This is important because your pension is not part of your estate and so isn’t technically covered by what is in your will.
21. Get a state pension forecast
Check your entitlement based on your current National Insurance contributions to see if you are on track for a full state pension here.
How to get your pension on track
Do you have no pension? Find out how to set up one from scratch here.
If you are worried about your pension and whether you will have enough, read a full 10-step guide to sorting it out here.
To get started, investigate your existing pensions. Broadly speaking, you need to ask schemes the following:
– The current fund value
– The current transfer value – because there might be a penalty to move
– Whether the pension is in a final salary or defined contribution scheme
– If there are any guarantees – for instance, a guaranteed annuity rate – and if you would lose them if you moved the fund
– The pension projection at retirement age.
You can use a pension calculator to see if you have enough – find This is Money’s here.
You should add the forecast figures to what you anticipate getting in state pension, which is currently £179.60 a week or around £9,300 a year if you qualify for the full new rate.
Get a state pension forecast here.
If you are tempted to merge your old pensions, check out some tips on how to decide here.
If you have lost track of old pensions, the Government’s free tracing service is here.
Take care if you do an online search for the Pension Tracing Service as many companies using similar names will pop up in the results.
These will also offer to look for your pension, but try to charge or flog you other services, and could be fraudulent.
If you are in your 20s, we have a special pension guide here. Self-employed people can find out how to sort out their pensions here.
Women, who tend to miss out because they get lower pay and do unpaid caring work, can find out how to increase retirement savings here.
TOP SIPPS FOR DIY PENSION INVESTORS