Shape up your pension

image of woman running on a treadmill representing running to the pension

Pensions

MoneyPlus Features Team

5th May 2014 at 1:32pm

Many of us spend a fair bit of time and money doing our best to stay in shape. We’re regularly checking for gains and rejoicing any losses. But how often do we give our finances such scrutiny and consideration?

For example – are we as diligent when it comes to checking for gains and losses with our pension? I suspect not, but it’s easier to keep your pension in shape than you might expect with these 4 simple steps.

A pension health check

No matter how big or small your investment is, it’s important to review it regularly to make sure it still meets your needs. No matter how big or small your investment is, it’s important to review it regularly to make sure it still meets your needs.Your circumstances may have changed and you may be more or less willing to take more risks with your investments.

Although choosing and moving investment funds can be daunting for some, many providers offer a range of ready-made funds that you can choose to invest in depending on your appetite for risk. There’s more information here to help.

Small sacrifices big gains

Even a little bit extra can make a big difference.

Giving up something as simple as a takeaway coffee on each working day could give your pension a real boost over time.  Giving up a coffee which costs £1.95 could free up cash of around £487.50 a year, based on an average of 250 working days in the year.

Pay that saving into your pension and the taxman will give you an extra £121.87 a year if you’re a basic rate taxpayer.  That’s an extra £609.37 going into your pension each year. It may not seem a lot, but over 30 years and with a steady growth of 7% a year, that could give you a fund of around £51,000, after charges and allowing for inflation.*

Get lean

Having your pension in one place makes it simpler to keep track of your investments and of the size of your pension pot. It’s easier to see how much money you’ve got saved and will help you plan for the retirement you want.

Transferring a pension is probably a lot easier than you think and one pension plan may mean lower annual charges if you could also benefit from a discount for having a bigger pension pot.**

Take a supplement

If you are not contributing you are missing out on free money through the government top-up. If you’re a basic rate tax payer, for every £80 you pay into your pension, you end up with £100 in your pension pot. That’s because your pension provider claims tax back from the government at 20%. If you’re a basic rate tax payer, for every £80 you pay into your pension, you end up with £100 in your pension pot. That’s because your pension provider claims tax back from the government at 20%.

If you’re a higher or additional-rate taxpayer (40% or 45%) you need to claim back your additional tax relief from HMRC. This is because only basic-rate tax relief of 20% is added on to pensions automatically for certain types of pensions.

Remember, if you pay into your pension pot using a salary exchange arrangement, there is no tax relief to reclaim, which removes the paperwork for you. This is because your employer pays the money you’ve exchanged from your salary into your pension pot before any tax is deducted.

The future worked out

By spending a little time and effort regularly reviewing your pension, by checking you’re on track and in the right investments, you can ensure your future finances are looking good and in the best of health.

* The value of tax relief could change depending on your individual circumstances. The figures above are based on our understanding of tax rules in March 2014 and they may change in the future.  Calculations used an inflation rate of 2.1% and an AMC of 1%.

** Your current circumstances are an important factor. Bringing your pensions together into one plan may not be right for you as you could give up important benefits such as defined benefits, ‘with profits’ bonuses and enhanced tax-free cash. There’s no guarantee your value will be higher if you transfer into one plan.

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This blog and any responses to comments should not be regarded as financial advice.  A pension is an investment.  Its value can go up or down and it may be worth less than you paid in.