How to make the most of your pension

Laura Miller

by , Freelance financial journalist

at PensionBee

15 Jan 2021 /  

Hand squeezing a lemon

Saving for a comfortable retirement can be tough even at the best of times. So making the most of every tip and trick to grow your pot matters. Here’s nine of the best.

1. Start saving now

The younger you start a pension, the more time it has to grow. Auto-Enrolment applies to workers aged 22 or over, but younger people earning £6,240 or more can opt in and benefit from extra money from their employer. With 40 years of saving and investing to play with, young people can afford to take more investment risks as they should balance out over time. Savers who start early will also benefit from greater rewards helping to grow their pension pot in the long-term.

2. Avoid high fees

Keeping the fees and charges you pay low means keeping more of your pension – 1% a year may not sound like a lot but over 40 years that could mean tens of thousands of pounds less for you to spend in retirement. When stock markets fall, poor investment returns are compounded by high charges, meaning it will take your nest egg longer to recover. Check your fees on your pension statement and shop around for a cheaper deal.

3. Think about combining your pension pots

Combining, or consolidating, your pensions with a company like PensionBee means only paying one set of charges, and likely more compound growth over time. Put simply, compound interest works like this. You have some money. You save or invest it to earn a rate of interest. This interest is added back to the principal sum, making it bigger. You keep the new total – the starting amount plus the interest – invested or saved. You earn interest on that – more, in fact, because you are earning it on the new total. So your pot gets even bigger.

And this happens the next time, and the next time, and the next. That’s the power of compounding. The bigger your pot to start with, the more compound growth works in your favour over time. Some pensions have valuable benefits you may want to keep though so check your pension before making any decisions.

4. Watch out, women - don’t miss out on pension contributions

Time off or working part-time to raise a family or care for elderly relatives, as well as lower pay, mean that on average women have pensions a third smaller than men. To help combat this, women planning to have a child should stay in their workplace pension scheme while on maternity or adoption leave. Those not working can still put £3,600 a year into a pension, and if you can’t afford to keep up the contributions yourself perhaps an earning partner can contribute instead. It’s also crucial to claim Child Benefit (even if you waive it as a higher earner) for the National Insurance Credit that goes towards the State Pension.

5. Increase your pension contributions with inflation

When you get a pay rise consider increasing your pension contributions by the same amount, if you can. Most of us only get fairly modest pay rises these days in line with inflation so you may not miss it if you squirrel it away into your pension instead. Remember, you were able to live fine on your wages before the raise and consider how over a 40-year career this could really add up.

6. The self-employed still need to save for retirement

With often volatile incomes, the self-employed are traditionally quite bad at saving for retirement. However now with PensionBee it’s possible to start a new pension for free with no minimum contribution amounts. Starting one as soon as you begin making a profit means getting tax relief to help it grow. And you can also pause contributions through periods of lower income.

7. Check your State Pension entitlement

How much State Pension you get is based on your National Insurance Contribution record. If you’ve had periods not working during your career, your NI record may be incomplete. However, you can ‘buy’ up to 10 years to compensate. One full year’s NI entitlement currently costs £15.30 per week (£795 per year), and you typically get back much more in return. Check how much State Pension you could get on the website.

8. Contribute more in the 10 years before retirement

Stuff as much as you can into your pension in your 50s – these should be your peak earning years so it’s important to make the most of them and put away as much as you can into your retirement pot to benefit both from the tax relief and your employer’s contributions. ‘Carry forward’ rules also let you fill up any unused annual pension allowances from the previous three years – again useful when you begin earning more late in your career.

9. You may be eligible for carer’s credits

You could get Carer’s Credit if you’re caring for someone for at least 20 hours a week. It’s a National Insurance Credit that helps with gaps in your National Insurance record, which as mentioned earlier, affects your State Pension entitlement. Your income, savings or investments won’t affect eligibility for Carer’s Credit. Check if you’re able to get Carer’s Credit on the website.

Laura Miller is a freelance financial journalist.

Risk warning: As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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