retirement planning – ways to boost your pension value

Today I want to cover the topic of retirement planning once again. The topic that I believe is really important to all of us. Something that each one of us has to think about really early in our lives.

Once you retire the government will provide you with a basic state pension. This unfortunately currently stands only at £142 a week. This is only roughly £600 a month. It isn’t really that much money to be able to afford the retirement of your dreams.

I have previously discussed that there are two major ways of looking at your retirement planning. The first is top down and the second is bottom up. You can read more about these here.

Those of you interested in a bottom up approach, the below is a good starting point on how to build yourself a more comfortable retirement pot. There are two ways to approach the building of your retirement pot if you are in full time employment. I will discuss both of these below.

Retirement planning through self invested personal pension (sipp)

For those of you who are contributing to your SIPP there might be free cash being left on the table. Hopefully the below helps you understand if you can increase the size of your pot even further.

When you are contributing to SIPP your investment holder should be receiving 20% tax return from government to be added to your pension pot. I would however make sure that this is actually happening by speaking with someone within the company.

You have an opportunity to increase your pension pot if you pay above basic tax. If you are earn over £50,000, the salary above that has 40% tax. There is a possibility for you to get that extra 20% tax refunded into your SIPP. You will need to fill-in a self-assessment form once a year to benefit from this. It is a bit of admin that you need to do however definitely worth it in my view.

The government will pay back the tax difference between the 20% and 40% into your SIPP. This is automatically added to your pension pot through the company holding your SIPP.

workplace pension schemes

It is currently a law for you to be automatically enrolled into a company pension scheme. You can opt out if you don’t want to be part of it. It can cost you dearly in the long run if you opt out.

You contribute 5% of your salary. On top of that, your employer tops it up with further 3% of your salary as a minimum. Some companies will have different rules and figures might be higher to start with.

Often companies offer to match your additional contributions into your pension scheme. Let’s say you increase your contributions by 2% and the company will match that.

If the above is true with your employer – the 8% minimum pension would turn into 12% by you giving up only 2% of your salary. I would suggest you having a chat with someone in your HR in order to understand what options you have.

Pension contributions come out of your salary before tax. This means that the value that goes into your pension pot is higher than your take home salary drop is. One way to look at it – government is happy to lose their tax income in order to boost your pension pot.

For those who are paying more than basic tax the government contribution part is going to be even more significant. If you want to learn more about the different tax bands in the UK you can read it here.

so what do the numbers actually look like?

Below I want to give you an example of what the workplace pension benefit could actually mean to you. I will be making a couple of assumptions here so this won’t be accurate for everyone. It is however fairly easy to calculate how big of an extra amount of pension you could be getting yourself if your salary is significantly different.

Based on my research, the average annual salary in the UK is currently roughly £33,000. I will use this figure as our starting point. I also assume that you have been enrolled into the basic required workplace pension scheme. That means 5% from you and 3% from the employer.

Some other assumptions are as follows:

• You are going to contribute to this pension scheme for 30 years
• Your contributions will remain the same – this is actually likely to increase over time as your salary keeps increasing
• 6% annual return in your pension (very modest in my view – I will share tips on how increase this in a separate article)
• There are no fees being charged – this isn’t realistic but the below is just for illustration purposes

I will also do the second scenario – both you and your employer contribute extra 2% on top of minimum required contributions. 

And the numbers are as follows:

You can see the outcome for yourself. If you increase your pension contribution by 2% your take home salary will reduce by only £36 a month. I believe this is something you can afford to invest for your own future.

Look at the bright side though – the value of your pension pot after 30 years would increase by over £90,000. Isn’t £36 a month investment worth that sort of benefit and upside? You can also imagine what would happen if you increase the contributions slightly further.

The biggest thing to double check is your companies policy when it comes to pension contributions. This will play a significant role in the size of your future pension pot.

Also, can you imagine the difference a tiny contribution increase can make if you are earning double the UK average? If you are interested in what your take home salary might look like with different pension contribution levels – please use this tool.

how to start my retirement planning if I don’t know where my past pensions are?

There are many people like myself who have changed a fair number of companies they worked for in the past years. This might sound like a slight challenge in order to find all of your old pension pots. There are some good news for you! There is actually a website that can help you with this task.

Just follow this link and fill in the required information. It will tell you the details of the companies that are currently holding your pensions. It could be a good idea to consolidate all of these in one place. I will discuss the benefits of doing so in one of my future posts.

summary

There are two ways to build your retirement fund if you are currently employed by a company. Both of these can be powerful and can make your retirement a more enjoyable part of your life.

The little contributions that you are able to do right now can really add up over time. This is where we can see the power of compounding at its best.

Decide what’s best for you. Not everyone is able to contribute more and that is fine. If you are one of the fortunate ones who can do so I would really encourage you to benefit from all the extra contributions you can get.