We spend our working lives building towards a comfortable retirement. But with the cost of a comfortable retirement on the rise, many Brits are looking for ways to optimise their retirement income. This is proving to be easier said than done as spiralling inflation makes increasing our monthly pension contributions more challenging than ever. However, these five pension tips could help you reach the financial freedom that you’ve worked so hard for.
1. Max out your employer pension contributions
This pension strategy could save you a lot of grief further down the line. Your workplace benefits package is important and you should aim to get the most out of it. If you are not sure how much your employer is contributing to your pension, check with HR. Some employers will match or even double-match employee contributions beyond the 8% auto-enrolment minimum.
Usually, employers will offer some flexibility with what they contribute. But if the offer is there, consider your current contribution and whether you can increase it. If your employer doubles that up, it is essentially free money waiting for you in retirement.
2. Consider salary sacrifice
If you contribute to your pension via salary sacrifice, you might be surprised that it could save a few quid in tax. If your salary is close to the next tax bracket, upping your contribution will mean you don’t have to pay that extra tax. As things stand, the higher rate tax threshold is 50,271. Let’s say your pay goes up from £50,000 to £55,000, you have to pay 40% on the £4,729 over the threshold.
However, you don’t have to pay the higher rate income tax now, if you decide to put that amount into your pension (via salary sacrifice). This pension tip could come in handy considering the wage inflation that we’ve seen recently.
3. Make sure your pension is beating inflation
The UK inflation rate is running at 5.5% in the 12 months to January 2022. This is more than double the Bank of England’s target, and there is a chance that your pension returns are not beating it. However, remember that pensions are long-term investments, so don’t panic just yet. It’s good practice to be aware of your yearly returns that should beat inflation over several decades.
However, if your pension fund continues to be outpaced by inflation, you might consider rethinking your risk levels. This strategy involves redistributing your portfolio with assets that could get back on top of the price rises, like equities. Note, that this is not guaranteed as equities could fall any time or fail to keep pace with inflation.
4. Explore the benefits of a SIPP
If you have aspirations to manage your own pension portfolio, this could be the right time. Many employers are now willing to pay pension contributions into a self-invested personal pension (SIPP), so it’s an option worth exploring with HR.
As there are no restrictions in place, you can move any old pension pots into a SIPP. You just need to make sure you understand the risk when it comes to consolidating old pensions. When it comes to your current pension, however, a good strategy is to keep your employer contributions.
5. Assess whether early retirement is an option
A lot of people dream about early retirement. However, without serious planning, the dream could quickly turn into a nightmare. However, if this is within your reach, consider ploughing some of your retirement money into ISAs.
ISAs have helped more than 2,000 Brits achieve millionaire status and they can help fund an early retirement because your income is tax-free and can be accessed before the normal minimum pension age (NMPA).
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About the author
Nas is a freelance writer who is passionate about all things personal finance. He’s an accredited MRS researcher, aiming to bring content that allows readers to make better financial decisions.
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