The UK state pension age has been raised to 66 and is set to increase further, while the government has recently frozen the triple-lock on State Pensions that provides protection against inflation. With this in mind, you may be looking for pension tips to boost your private pension.
As people look to supplement their State Pension to secure a comfortable retirement, more than 50% of the population in the UK are investing in a private pension according to the Pensions Policy Institute.
If you’re thinking about making a pension contribution before the current tax year ends in nine weeks, here are my top four pension tips.
[top_pitch]
1. Use tax relief to top-up your pension contributions
Pension contributions are attractive as the government ‘tops-up’ your contributions by a further 20-45%. There are two different levels of tax relief on pension contributions:
- Basic-rate taxpayers: 20% is added to contributions. Pay £8,000 into a pension and the government will top-up another £2,000, making a £10,000 total contribution.
- Higher-rate taxpayers: you will also receive the £2,000 top-up if you invest £8,000. However, if you pay tax at 40%-45%, you can claim back another 20%-25% in tax relief through your tax return. As a result, 40% taxpayers effectively pay £6,000 towards a £10,000 total contribution.
However, with the government looking to rebalance their finances, there’s been continued speculation that the chancellor may limit relief on higher-rate taxpayers’ pension contributions. The Financial Times reported that “pensions tax relief looks ripe for further cuts.”
What if I don’t pay any tax? Good news: you can currently contribute up to £2,880 per year into a pension which the government will top-up by a further £720 to make £3,600.
If you contribute to a workplace pension scheme, the tax relief is applied automatically. If you contribute into a self-invested personal pension (SIPP), the basic-rate tax relief is claimed automatically by your SIPP provider, which takes around six to eight weeks.
However, there are limits to tax relief on pension contributions, along with lifetime allowances, so it’s important to check your own individual tax circumstances.
2. Take control of your pension by investing in a SIPP
Why should you invest in a SIPP? Well, it gives you complete control over your investments. You are responsible for choosing and managing your investments in the pension ‘wrapper’ until retirement. Some employers will contribute to your SIPP rather than a workplace pension. I’ve also moved pensions from previous employers into my SIPP so that I can manage them in one place.
Most of our top-rated Stocks and Shares ISA providers also offer SIPPs. When you’re considering which SIPP provider to use, two things to consider are:
- Fees: these can seriously erode the value of your pension investments over time. Hargreaves Lansdown, one of our top-rated providers, charges a sliding scale on the total value of funds in your SIPP, starting at 0.45%. Interactive Investor charges a flat monthly fee of £10 on top of its £9.99 service plan, which may appeal to people with higher-value pension pots.
- Choice of investments: SIPPs can be invested in a range of assets from funds and investment trusts to shares and bonds. Both Interactive Investor and Hargreaves Lansdown offer a choice of over 2,500 funds.
3. Start contributing to your pension as early as possible
Investing in your pension should be considered alongside other financial commitments, and it’s worth remembering that you can’t normally access the money in a SIPP until you’re 55 (rising to 57 in 2028).
However, another pension tip is that the earlier you invest in your pension, the more your pension pot will grow due to the power of compounding. Here’s how it works.
- If you invest £1,000 in your pension when you are 30 and receive a 5% average yearly return, your pension pot will be worth over £4,300 when you’re 60.
- Invest the same amount when you’re 45, and it will be worth just under £2,100. Delaying investing by 15 years means that your pension pot would be 50% smaller.
Hargreaves Lansdown and Interactive Investor allow you to invest from £25 per month into their SIPPs, with the benefit of smoothing market fluctuations by drip-feeding your money over time.
[middle_pitch]
4. Diversify your portfolio to spread risk
As with stocks and shares ISAs, it’s important to diversify your portfolio across different assets to manage your risk.
Risk profile typically varies by age:
- Younger investors may choose higher-growth strategies as their pension pots have time to recover from any dips in the stock market. This strategy could also help you beat inflation, which is currently at 5.4% – its highest in nearly 30 years.
- People in their 50s and 60s may opt for more conservative investments to reduce the risk of their pension value being hit by a market downturn.
If you’re looking to invest and need some inspiration, read our article on the top funds bought by UK investors last month.
