Chris Newlands
The cost of retirement is on the rise, making it more critical than ever to think about ways to boost your pension savings.
The latest research from the Pension and Lifetime Savings Association shows stubborn inflation, particularly rising food, energy and motoring costs have pushed up the amount of money needed to fund a comfortable retirement.
The costs of enjoying the finer things in retirement has shot up from £37,300 to £43,100 for a single person and to £59,000 for a two-person household.
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While purchasing National Insurance credits can help plug the holes in your state pension, topping up your private pension contributions by even a small percentage throughout your career could lead to tens of thousands more pounds in retirement.
And that’s not the only plus side to increasing your pension contributions – doing so could minimise your chances of moving onto a higher tax bracket.
The government recently scrapped the cap on the pensions lifetime allowance, which could also encourage workers to increase their pension contributions.
And there is a case to be made for women upping pension contributions, when possible, to overcome the gender pension gap. Here’s everything you need to know.
How to boost your pension pot
Data from Standard Life shows that topping up your pension contributions by just 2% of your salary over the course of your career could lead to a boost of £108,000 in retirement.
The analysis showed someone who began working full-time with a salary of £25,000 per year and paid the standard monthly auto-enrolment contribution of 3%, with a 5% contribution from their employer, from the age of 22, would have a pension pot worth £434,000 aged 66.
But if they increased their monthly contribution by just 2%, they would accumulate £542,000 – a £108,000 increase. Even a 1% increase would lead to a £54,000 boost for this worker’s pension pot.
An employee who boosted their contributions to 8% would benefit from a £271,000 increase to their retirement pot.
| Total retirement fund aged 66 | |||||
| Standard contributions of 3% employee and 5% employer | Contributions of 4% employee and 5% employer | Contributions of 5% employee and 5% employer | Contributions of 6% employee and 5% employer | Contributions of 7% employee and 5% employer | Contributions of 8% employee and 5% employer |
| £434,000 | £488,000 | £542,000 | £597,000 | £651,000 | £705,000 |
| Row 3 - Cell 0 | +£54,000 | +£108,000 | +£163,000 | +£217,000 | +£271,000 |
The data is calculated based on a 3.50% salary growth per year, and yearly investment growth of 5%.
It shows how savers who know to put money into their pension pot early can benefit from the magic of compound interest. The longer your money is invested, and the more you contribute, the more it will grow over the course of your career.
“For those in a position to do so, consistently paying into a pension from as early an age as possible and topping up payments, especially in your 20s, 30s or early 40s, can make a massive difference over time,” says Dean Butler, managing director for customer retail investing at Standard Life.
Even a 1% increase could make a difference.
Analysis by wellbeing platform WEALTH at work suggests someone in their 20s saving an extra 1% a year with their employer matching this, may be able to increase their pension pot in retirement by 25%.
For example, a 25-year-old basic rate taxpayer earning £40,000 per year could increase their contributions by 1% of salary, matched by their employer.
The cost to the employee of this increase in contribution is a reduction in take home pay of less than £23 per month or £272 per year but this would boost their pension pot at retirement by 25% from £198,683 to £248,353.
This assumes their salary increases by 2.5% each year, pension charges of 0.75% apply, investment growth is 5% each year and the pension value is adjusted for inflation at 2.5% each year.
"With increasing costs, it is completely understandable why some may think that saving for retirement isn’t a priority," says Jonathan Watts-Lay, director, at WEALTH at work.
"However, it’s important to recognise that whilst finances may be tight now, stopping or reducing your pensions savings could have a dramatic impact on future retirement plans.
“Small increases can have a significant impact on your pension savings, but small reductions in your pension savings can also make a huge dent."
How else can you boost your pension?
The scrapping of the lifetime allowance means employees can now save however much they want into their pension without being taxed.
It should be noted, however, that the sum you can take out of your pension without being taxed is capped at £268,275, or 25% of the previous lifetime allowance limit of £1,073,100.
That said, there are ways to take advantage of the new, more generous pension allowances.
One way is to make sure you’re rolling over unused allowances. The pensions annual tax-free allowance increased to £60,000 from £40,000. Workers can pay £60,000 plus £40,000 from the last two years into their pension.
So if you didn’t use up your allowance over the last couple of years, this could be a way to boost your pension pot.
You could also consider delaying taking your state pension. Your state pension will increase every week you defer, as long as you do so for at least five weeks.
If you reached state pension age before April 2016, your state pension increases by 1% for every five weeks you defer, or 10.4% for every year. The amount will be paid with your regular state pension.
If you reached the state pension age after April 2016, your pension will increase by 1% for every nine weeks you defer, or 5.8% a year. This is a less generous allowance, but it would still be an increase of £203.85 a year assuming you get the full new state pension.
Consider also buying National Insurance credits to boost your state pension Spending just over £800 to purchase NI credits could add £5,500 a year to your pension pot in the future. The deadline to purchase has been extended to April 2025 after the low-risk scheme proved popular among savers.
Do women need to make more contributions?
While we all want to boost our pension pots to make the most of retirement, many women are reaching retirement age with about a third less saved into their private pensions than men, according to the Department for Work and Pensions (DWP).
For every £100 a man has in his pension, a woman has just £65, meaning women are more likely to face a significant shortfall in having a comfortable retirement - commonly known as the gender pension gap.
One way to address this is by upping contributions once children have flown the nest. Investment platform interactive investor ran the sums and found contributing an extra £200 per month from the age of 50 could increase your pot by up to £64,104 by age 67, assuming 5% investment growth.
New research into the gender pension gap by Almond Financial has forecast a 90-year-long waitlist for equality from 2024, with the gap to persist until the year 2114 according to the current trend.
Sam Robinson, principal financial adviser at the firm, says women should make sure they thoroughly check what pension packages their firm offers, while also taking advantage of shared parental leave.
“By sharing parental leave and encouraging men to take their full entitlement, women can be supported in returning to work sooner with full pay, which boosts their ability to save for retirement,” he says.
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