If you’ve found yourself with spare time during lockdown, now could be a good time to sort out your pension. Some small changes can reap rewards over the long term. Here, we consider five tips to maximise your potential retirement pot.
1. Track down old pensions – and consider consolidating
Chances are, you will pay into several workplace pension schemes throughout your career, which can cause an administrative headache. However, more importantly, your money may be invested in workplace default pension funds, which may not have the greatest growth potential over the long term or be sufficiently diversified. Get details to check your current balance, and the performance of your funds.
One option is to consider consolidating several small pension pots into a larger one to potentially benefit from cost savings. However, a detailed review by a financial planner may be essential, to ensure you are not giving up any valuable benefits.
2. Maximise employer contributions – or you’re saying no to a salary rise
Top up your pension to ensure you get the maximum from your employer. Many employers will pay a percentage of your salary into a company pension scheme – and if you don’t make the most of this, you’re essentially turning down a pay rise.
How much you benefit from employer contributions typically depends on how much you pay into the company scheme. If you pay in 3% of salary, for example, your employer may top this up to 8%. Check the maximum that your employer is willing to contribute to your pension, and make the most of this – over time, these additional payments can make a substantial difference to your retirement pot.
For example, take an employee earning €50,000 and saving 3% of salary into their pension. An additional 5% from employer contributions makes an annual contribution of €4,000 per year. However, this costs the employee just €900 a year, given tax relief at the higher rate.
3. Boost your pension tax-efficiently – and maximise your retirement pot
If the pandemic has altered your retirement plans you may need to see what you can do to boost your pension over the next few years. Remember that every €100 you invest will only cost you €60 if you’re a higher rate taxpayer, and €80 if you are a standard rate taxpayer.
If you are under age 30, you can claim tax relief on 15% of your net earnings, rising to 20% if you are aged between 30 and 39. From age 40-49, you are able to claim relief on contributions of up to 25% of your pay, rising to 30% from age 50-54 and 35% up to age 59. If you are aged 60 or over, you can claim relief at up to 40%. For example, a 60-year-old earning €50,000 could contribute €20,000 a year and benefit from full tax relief on this, which can hugely boost a pension pot as they approach retirement.
However, bear in mind there is a limit to the amount of earnings you can receive tax relief on, amounting to €115,000 per year.
4. Consider paying more in – if your finances allow it
You may be able to further boost your pension by making additional voluntary contributions (AVCs). You could potentially pay more into your pension every time you receive a pay rise, for example. You will benefit from tax relief at your highest rate, the same as making normal pension contributions.
However, a financial adviser can help you work out the best course of action depending on your personal situation, and whether it’s wise to increase pension contributions, or pay down debt or your mortgage, for example.
5. Start thinking about retirement – annuity, or ARF?
Your retirement plans may have changed following the impact of the pandemic. You may have decided to delay retirement to give your investments the chance to recover in value, or perhaps you have decided on a phased retirement while accessing your pension.
Alternatively, you may need to retire earlier than planned and start taking your pension benefits. If you’re considering an approved retirement fund (ARF), meaning your pension stays invested until retirement, you may need to alter your investment strategy as you approach retirement. However, if you are likely to opt for an annuity, your pension pot will be exchanged for a guaranteed income for life at retirement.
However, while annuities used to be a popular choice among retirees, they have suffered over the years and currently offer poor value. “It is much rarer to see people going down that road now,” says Andrew Fahy, head of tax and financial planning with Brewin Dolphin. He stresses that an ARF enables your retirement pot to grow in value during retirement. The really important point is that the money doesn’t die with the individual: it is a fund to be passed on,” says Fahy.
Under proposed government changes, ARFs may be replaced by a whole-of-life PRSA. This may affect how they are treated for inheritance tax purposes.
Our experts can help tailor a strategy to achieve a comfortable retirement. Retirement income typically comes from a variety of sources, including savings, investments and pensions.
We can build a financial plan to maximise the potential benefits of your money over the long term, and maximise any tax planning opportunities.