3 shrewd ways to boost your pension – and why starting early is number one

27/05/2022

Starting a pension as early as possible is probably the best way to boost your retirement fund. Discover why, as well as two other ways to boost your pension.

According to research by the Social Market Foundation (SMF), the typical 50- to 64-year-old has a pension pot that’s 58% below the level needed for the retirement they want.

It concludes that one reason for this is a lack of knowledge about pensions, which means that many within this age group could be missing out on a better quality of life when they finish work.

While these are startling revelations, perhaps the most shocking is that just 20% of this age group consult a financial planner about their retirement fund.

As clients of Douglas White, you have peace of mind that we’re always on hand to ensure that you understand your options, so that you can make better decisions regarding your retirement.

That said, you may know others who are considering retirement but are facing a pension shortfall. If so, discover three shrewd steps they could take to boost their pension pot and how we could help.

Before we do, let’s consider the SMF’s findings in more detail.

On average, those reaching retirement age have a significant pension shortfall

The foundation reveals that more than two-thirds of 50- to 64-year-olds don’t know how much they’ll need for retirement.

Additionally, the typical person within the age group has pension savings that are 58% short of what they require, with those approaching retirement age having an average shortfall of almost £250,000.

This is why the importance of speaking to a financial planner when preparing for retirement cannot be overstated.

As the SMF’s report shows, not doing so could result in a much lower standard of living in retirement and put a pensioner’s long-term financial security at risk. With this in mind, let’s now look at three positive ways we could help someone boost their pension pot.

1. Start contributing earlier

A recent study by Aviva shows that around half (49%) of over-50s regret not saving into their pension sooner. Of all the ways to boost a pension, starting as soon as possible is one of the most effective.

This is because it allows contributions into a retirement fund to benefit from compound growth for longer, which could significantly boost the value of their pension pot.

Compound growth is when your money enjoys growth on the growth it’s already made. To demonstrate this, if you use a compound interest calculator you’ll see that a £20,000 investment with an average annual growth rate of 3% would grow by £6,987.07 over 10 years.

By comparison, if you received 3% simple interest your money would have grown by £600 every year, totalling £6,000. Compounding has therefore boosted your returns by nearly £1,000, and over 20 years it would provide an additional £4,415!

Please note, the calculation does not include investment costs or other factors such as inflation.

2. Increase contributions

Money contributed to a pension typically receives tax relief, which means that every £100 put into a scheme “costs” a basic-rate taxpayer just £80. A higher-rate taxpayer only pays £60, and an additional-rate taxpayer pays just £55 for a £100 contribution.

That said, while you can contribute any amount to your pension the amount of money that enjoys tax relief is usually limited to your Annual Allowance. In 2022/23, this is the amount you earn or £40,000, whichever is the lower.

As you can see though, with tax relief, increasing contributions could provide a significant boost to a pension pot.

3. Locate lost pensions

According to Pensions Age, an estimated 1.6 million pension pots have been “lost” or are dormant in the UK. If this includes pensions held by someone you know, finding them could provide a significant boost to their retirement fund.

We could help with this, and provide options to ensure a newly found pension pot boosts their retirement fund by as much as possible. For example, as Motley Fool reveals, some older pensions have higher fees than modern funds, which could significantly reduce their growth potential or even eat into their value.

As such, they might want to consider moving the pension to a more modern fund with lower charges. As doing this might carry financial risks, never switch a pension without speaking to a financial planner, who can confirm whether it’s right for them and explain the implications of doing so.

Get in touch

While these three steps could help boost someone’s pension pot, it’s not an exhaustive list. There are other ways we could help someone you know boost their retirement fund, so that they could enjoy the lifestyle they want when they finish work.

This might include merging pensions or using other assets as part of a pension strategy. If you know anyone we could help, just email us at info@douglaswhiteltd.com or call 0151 345 6828 and we’d be delighted to talk to them.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.