How are you feeling about your financial prospects in retirement? Do you have any idea of how much you’re likely to need when you stop working, or how far your current pension pot will go towards that?
If the answers to those questions are “Not sure to be honest”, “No”, or “Not really”, you’re by no means alone. While you probably receive regular statements from your current pension provider and may know roughly what that pot is worth, it can be very hard to assess either what sort of income you might need in retirement or how close you are to achieving that.
Indeed, Pension & Lifetime Savings Association (PLSA) research shows that only 23% of people are confident they know how much they’ll require for retirement.
In response to that conundrum, in 2019 the PLSA came up with some useful ballpark benchmarks called Retirement Living Standards to help people track whether they’re on course for the kind of retirement they aspire to.
These comprise a “minimum” standard of living, at around £10,000 a year for a single person or £15,000 for a couple; “moderate” (with greater security and financial flexibility) at £20,000 or £30,000 respectively; and “comfortable” (with more luxuries) at £30,000 or £45,000.
The question, then, is where your pension pot stands in relation to those benchmarks. To answer that, you first need to establish exactly what you’ve got.
Work Out How Much You Have Saved
Start by getting an up-to-date state pension forecast, which will include the date at which you can claim your pension. The full state pension for 2021/22 is £9,339, but if you’re due less than this, you may be able to make voluntary top-up payments which can be extremely worthwhile, as they boost what you’ll receive for the rest of your life.
Next, it’s time to get a handle on your workplace and personal pensions. As well as looking at your current pension, you should track down all those unread letters from old pension providers and get up-to-date statements for pensions from previous jobs, including looking for “lost” pension pots if you haven't heard from a pension provider for a while.
Given that many people these days will move through six or seven jobs in the course of their career, it’s unsurprising that pensions from past employers get mislaid. The Association of British Insurers estimates that around £20 billion is sitting in more than 1.6 million “lost” pots, in most cases in underperforming default funds and overpriced schemes. If you’ve mislaid the details of past pensions, you can make use of the government’s free Pension Tracing Service.
When you’ve tracked down your old pensions, consider consolidating them by transferring them all into a single pension such as a low-cost Sipp account, so you can see exactly what you’ve got and manage them all in one place.
How to Boost Your Pension Pot
Assuming you have a limited period before you’d like to stop or reduce work and are still concerned about the size of your fund, it’s then time to work out how you can increase current contributions.
One particularly tax-efficient tactic is salary sacrifice, if your employer offers it. This involves giving up a chunk of your salary, which your employer then adds to your pension along with the usual employer’s contribution.
In doing this, you’re effectively on a lower salary meaning you pay less tax, which can be particularly significant if you’re earning just above a tax threshold, as salary sacrifice can keep you in the lower bracket. Both you and your employer also pay less in National Insurance (NI) contributions, and your employer may choose to add its NI savings to your pension pot.
However, there are potential drawbacks: for example, your lower salary may affect what you can borrow for a mortgage or your entitlement to some state benefits. There’s more guidance on the Pensions Advisory Service website.
Another option for boosting your pension pot is if your employer will match extra payments you make into your occupational pension up to a limit and you’re able to increase your monthly contributions. In this instance it makes sense to increase your contributions up to that limit.
If those options are not available (or alongside them), consider building up a secondary pension of extra ad-hoc contributions in a Sipp account (perhaps you’ve already opened one for old pensions from previous jobs).
These could include freelance earnings or spare cash savings (though it’s sensible to keep at least three to six months’ income in cash for emergencies). Fiona Tait, technical director of Intelligent Pensions, suggests that Isa savings may also be an ideal and tax-efficient source of additional pension contributions. “Not only are withdrawals tax-free but the investment will be topped up by tax relief when it is invested in the Sipp fund,” she says.
However, it’s worth bearing in mind that Isa funds can provide a valuable tax-free income in retirement, which again might help keep you in a lower tax bracket or at least minimise your liability.
Should You Defer Your Pension?
The other important thing to think about when determining how much you need to save into your pension is what age you plan to retire. “Your retirement finances could look a lot better if you could work a year or two longer, perhaps deferring your state pension, or if you stepped down from full-time to part-time work rather than stopping altogether,” says Steve Webb, a partner at consultant LCP.
Deferring your state pension by a year, if you can afford to do so, will boost payments by almost 6% for the rest of your life. The strategy of continuing to work (and ideally pay into your pension), leaving your funds untouched could mean a significantly bigger pot at a later date.
Bear in mind, though, that your timing might be affected by what happens to the markets. A big fall when you’re about to stop work could mean further delays to allow your fund to recover.
