Pension Awareness Week: Top tips for your retirement savings

Pension Awareness Week runs from 9-15 September and involves a week of industry events highlighting the importance of being aware of our pensions.

September is a good time of year to engage with our pensions too. The end of the tax year is just over six months away, so it is a timely half-year point at which to review our contribution levels, allowances and any potential life stage changes that might be relevant to our retirement pots.

So, what can we do to ensure we’re getting the most out of our pensions? Here are some key tips to have in mind.

Measure contributions

For anyone with a workplace pension as their main retirement pot, contributions will be set automatically based on salary.

For defined contribution pensions the standard is for 5% of an employee’s salary to be put in the pension each month, with a top up contribution worth 3% of salary from the employer – although this can be higher.

The problem with this is, while a good starting point, depending on your income level, it might not be enough to match the long-term goals of their retirement savings. As such, it is important to consider whether you can contribute more to your pension savings to maximise long-term growth potential.

Although it can be tempting to save into an ISA alongside a pension, in the first instance pension saving is typically more beneficial – despite certain tax implications after retirement – thanks to the generous tax relief of 20% for basic rate taxpayers and 40% for higher or additional rate payers.

However, it is worth bearing in mind changes to this have been speculated for the near future.

Consider life events

Life for the most part doesn’t stand still. Be it the birth of children, a new career, retirement, divorce or anything else – we’re always moving forward one way or another.

This means that plans we might have set for our finances might need tweaking, adjusting, or even just reviewing from time to time.

Because of the complexity of pensions it is important to treat yours carefully to ensure you don’t face any unwanted tax charges. This is particularly the case as you approach retirement and consider moving into drawdown.

Inadvertently triggering a rule such as the Money Purchase Annual Allowance (MPAA) can cause real issues if you intend to continue working for some time as it will severely inhibit your ongoing ability to contribute to your pension pot.

Check performance

Portfolio performance in your pension is one of the ultimate arbiters of its long-term growth potential.

For many with workplace savings pots as their principle vehicle, they will be invested in the stock and bond market via what are called ‘default funds’. These are catch-all investment funds that serve the broadest remit for long-term savers.

But they might not be the most suitable for certain circumstances, and often don’t take appropriate risk approaches that can lead to inferior outcomes for you, the investor.

It is important to consider whether a default fund is the best option for you, depending on factors such as risk appetite and time horizon. A financial planner can help you assess these and ultimately pick the right investment approach for your needs.

Review tax changes

As alluded to previously with tax relief changes potentially on the horizon, pensions do suffer from tinkering by governments.

Most recently the former Conservative Government did away with the lifetime allowance on pensions, which was a really positive step for long-term utility of the pension as a savings vehicle. This change came with caveats, however, as it capped the tax-free lump sum at 25% of your pension up to a maximum of £268,275.

These changes are by no means guaranteed either. Pre-election, the Labour Government said it would reverse these changes. While it has since backed away from this pledge, what we can take from this chopping and changing is that nothing is certain.

For this reason, reviewing tax matters and changes as a matter of routine is essential. However, as before, a note of caution on tinkering is that doing the wrong thing can have significant implications for your pension pot and retirement plans. It is critical to consider all angles and ideally to take advice before making decisions.

Get advice

Pensions are so important to our long-term life goals and financial prospects that making mistakes with them can be life-shattering. That is why it is essential to consider seeking professional advice before making decisions that could affect your retirement pot for years to come.

An financial planner can help you plan your approach, where to allocate savings, investment options, and other important aspects. As you come closer to retirement a financial planner will help you look at future cash flow, where income can be drawn and in what order to maximise the tax efficiency of your retirement plans.