Five steps to pension perfection in 2017
The last thing anyone needs is another list of worthy resolutions where the chances of success are at best remote.
So what follows is different. These are five, one-hit measures through which you can save tax, boost returns and put your pension on track to last longer and generate greater income.
It’s an achievable checklist you could work through in a few hours. The benefits, though, could be life-long.
1. Make a ‘treasure’ map
Before doing anything, you need to know what you already have.
Millions of people will have a mixture of entitlements to the three main types of pension: one provided by the state ( based on your National Insurance record ); “final salary” plans (a guaranteed income based on your salary and length of service); and “defined contribution” (a simple pot of savings with no guarantees attached).
Check your state pension forecast using the Government’s dedicated website .
Under the new system – in force since April 2016 – the full state pension is worth £155 a week, just over £8,000 a year. You need 35 years of NI payments to get the full amount, though you can top-up missing years and buy extra income.
Next, make a list of all the companies you have worked for and, using the Government’s free Pension Tracing Service, email or write to anywhere you suspect pension entitlements may have been overlooked.
List these entitlements alongside your other pensions. The state and final salary schemes will give you a projected, guaranteed income for life. Defined contribution pensions are more tricky.
Although you may not end up buying an annuity (an insurance contract paying income for life) the rates offered by these are a useful guide as to how pension pots might translate into income.
As a rule of thumb, someone in their 60s could buy a flat, lifelong income of £4.50 per year for every £100 saved in a “defined contribution” type of pension.
Total the annual income each of your pots are likely to provide and compare this with how much you want to live on in retirement.
2. Boost contributions
If you’re working, the best way to build savings is through your employer, now legally required to set up and contribute to a pension on your behalf as part of “automatic enrolment”.
Employers must contribute a minimum of 1pc of your salary to a pension, but many firms will offer staff much higher amounts if you save more. A common “matching” deal would see your employer contributing the same amount as you, up to a cap: 5pc is common.
Respected think-tank the Pensions Policy Institute has said saving 14pc through auto-enrolment gives a two-thirds chance of retiring on about two-thirds of their salary. This is a useful guide for younger earners.
3. Check you’re not missing out on tax relief
Tax incentives on pensions are incredibly generous – for now.
Tax relief is paid up to your highest rate of income tax, so a higher-rate payer only needs to pay £60 to make a £100 contribution.
But there is a snag. Pension companies automatically claim tax relief at the basic-rate, 20pc, but it is up to individuals to claim the higher and additional-rate owed to them via their tax return.
True Potential, an adviser, estimated around £360m in pension tax relief will go unclaimed this year.
4. Match your investments with your plan
Whether your investment strategy is appropriate depends on what you plan to do with your pension. You may take the entire pot as cash, buy an annuity, or go into “drawdown” – drip feeding withdrawals and leaving the rest invested – or a combination of all three.
Many pension companies will make broad assumptions, based on your age and other factors, that could be completely at odds with your goals.
Your pension statement will give details of the “default” funds your pension is invested in if you have not made an active choice. Check these match your plan, and that the level of risk is appropriate. Some providers place a large proportion in cash to limit losses in the early years of saving, but this gives up the opportunity for growth, for instance.
5. Consider transferring
After gathering together the information gleaned in the first step, you might quickly see that it will save money to group some or most of your pension assets together.
Some schemes have better investment choice or even pay your management fees.
In addition, the flexibility of pensions can vary enormously in key areas. For example, older-style plans often only allow “death benefit” payments as a single lump sum, rather than a series of withdrawals. As a result, your descendants could pay more tax than they need to on your death.
Be mindful of what you are giving up, too.
Many contracts contain guaranteed growth or annuity rates which far outstrip what is available in today’s market. The same applies to giving up a final salary pension. Deals to swap the guaranteed income from these pensions for a cash lump sum are at eye-watering levels at the moment.
If you have enough guaranteed income from other sources it may make sense to swap £35,000 a year for £1.2m. But you must be prepared to take on responsibility for handling your own investments, and remember any transfer over £30,000 will require you to take financial advice.
This article was written by Sam Brodbeck from The Daily Telegraph and was legally licensed through the NewsCred publisher network.