You may have big plans for 2020. Pensions may be far down the list of fun things you want to do. But the start of a new year is a time for future planning. And that is what your pension is - an investment in your future.
Take a look at the checklist below and make 2020 the year you invest in your dream future.
1. Consolidation
We are a nation of job hoppers. The average person will now have 11 different roles throughout their lifetime. Another new job usually means another new pension. Soon you’ll have a dozen pots scattered far and wide.
Finding out how much you have - and how much more you need to save - can be tricky. You’re also paying a dozen different sets of fees, which are eating into a dozen small pots, making them smaller.
Bringing all of you retirement pots together - consolidation - can make everything neater and easier to manage.
Only paying one set of fees will also save you money.
You’ll be able to see clearly how much you have saved, and how far you are from your retirement goal. If you’re happy with the cheapest plan you can move all of your money into that one and save on fees. Only paying one set of fees will also save you money.
One bigger pot also benefits from better compounding of investment returns, and you’ll be able to assess this growth more easily because it’s all happening in one place.
Consolidation isn’t for everyone. There may be heavy exit fees to leave an old scheme, and if you’re in a defined benefit or ‘final salary’ scheme you may lose valuable benefits by transferring out. But for many people, consolidation is a cheap (and fairly easy) way to boost their pension savings balance.
If you’re using PensionBee to combine your pensions, they’ll tell you if they find that your provider charges an exit fee of more than £10, or if your pension has guarantees.
2. Change how your workplace pension is invested
Almost everyone who works full-time is auto-enrolled into their employer’s pension scheme. But millions of us are stuck in its default fund - this is a problem.
Designed to be suitable for just about anyone, default funds are fairly conservatively managed with only about 65% invested in the stock market.
Pensions are long-term investments. Stock markets go up and down but over time you generally end up a lot better off, all being well. Only investing 65% of your pension in stocks means you’ll miss out on a lot of years worth of potential investment returns.
Squeezing just an extra 1% of investment performance from your pension fund translates into a seriously fatter pot at retirement.
Assuming 8% pension contributions rising in line with inflation, financial experts project a 22-year-old earning £30,000 would get a pension £55,000 bigger from that extra 1% - more than double the £23,000 gained if they paid in 1% more from their salary.
3. Increase contributions
If you’re in a pension you’re already doing something fantastic, investing in your future. But sadly, you’re probably not saving enough.
Employees auto-enrolled into a company scheme have to pay in at least 5% of their salary and the employer adds in another 3%. But many experts say at least 15% in total is needed.
If you’re in a pension you’re already doing something fantastic, investing in your future.
PensionBee calculated the difference paying in an extra £100 a month could make to the average UK saver’s pension in the long-term.
Those in their 20s, who have the longest time to save before retirement, would make the greatest improvement - it would almost double their expected pots to £124,287. Those in their thirties could add around £44,000 to their expected pots, totalling £124,853.
In your 40s adding an extra £100 a month to your pension gets you around £118,640 at retirement - over £30,000 more. Even in your 50s you’d likely be much better off, adding another £15,000 to your nest egg.
Saving just £3.20 more a day, every month, into your pension, can give you the luxury of more choice in retirement - about what you eat, where you holiday, how you live.
4. Maximise your State Pension
Are you on track to get the most out of your State Pension? If you’re not sure, make 2020 the year you check!
For example, it was revealed this year more than 260,000 widows and widowers are getting a State Pension sometimes thousands of pounds higher because of a little known quirk in the rules.
In another case “significant” problems with incorrect State Pension forecasts meant 360,000 had been sent out with the wrong information.
Another trip up in the rules has led higher rate taxpayers, often women, to forget to register for Child Benefit (even when they’re not going to claim it), meaning they miss out on their National Insurance entitlement, putting their State Pension at risk.
Basically, the onus is on you to check you’re getting all the State Pension to which you’re entitled. Typically you’ll need 10 qualifying years on your National Insurance record to get any ‘new’ State Pension, and around 35 years to get the maximum. Time out of work to raise children or live abroad can mean you have gaps that will reduce the amount you receive.
Go online or contact the Department for Work and Pensions (DWP) for an up-to-date State Pension forecast. DWP will use your National Insurance record under old and new State Pension rules to calculate your State Pension. Check you’ve claimed credits for periods when you’ve been unemployed or looking after children.
If you find you have gaps in your work history, you can fill them with voluntary National Insurance contributions going back up to six years. There’s no need to bother if you’ve built up 30 years under the old system before April 2016.
Employees who were “contracted out” - a practice popular in the 1970s to the 1990s - before April 2016 will have paid lower National Insurance and so receive a smaller State Pension. Your private pension will include a “Contracted Out Pension Equivalent” to allow for this. You can also boost your state pension by deferring receipt of it.
If you are in any way unsure, speak to Pension Wise for free guidance.
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.
