PENSION contributions have fallen in the past year, just as the cost of living in retirement has come under an increasingly harsh spotlight.
The latest age-related inflation study from Alliance Trust calculated that for over 75s, inflation is running at 7 per cent, the highest level in the six-year history of the research. Inflation may be close to peaking, but the rate faced by those
in retirement is likely to remain above the official level, with pensioners spending more on costs that are set to continue rising, such as household energy bills.
Add rising longevity, which means the period of retirement to be funded is getting longer, and the need to put enough money away for a decent retirement couldn't be more stark.
Yet according to Hargreaves Lansdown, to generate a pension paying 50 per cent of final salary, the average contribution would need to be 23 per cent of earnings, for 40 years. Currently, however, the average contribution is just 10.3 per cent of earnings.
But improving your chances of retiring with a decent pension pot isn't mission impossible. Here are five of the most simple but effective ways of giving your pension pot a valuable boost.
1 TAKE ADVANTAGE OF YOUR COMPANY PENSION
This is a key part of pension investing and there are rarely good reasons not to join a company scheme available to you, according to Eoghann McPherson, chartered financial planner at Campbell Dallas Financial Services in Perth.
"There will be a contribution to the scheme by the employer, which would be forfeited in the event of not joining the scheme. In addition, there are often some additional benefits that are gained on joining the scheme, such as life assurance. Joining such a scheme is clearly a highly cost-effective and one of the very best ways of saving for retirement."
The employer contribution is the most attractive element, with most putting in around 3 to 6 per cent of your own salary (providing you also make contributions). Not to take advantage would be to say no to free money from your employer, not to mention significant tax benefits.
2 SALARY SACRIFICE
This is a tax-efficient strategy where you are essentially swapping a bit of your pre-tax pay for more pension contributions, so you don't have to pay income tax or National Insurance (NI) contributions. In some cases, companies pay some of the NI contributions they save back into the individual's pension.
For example, a higher rate taxpayer gets £1.91 paid into their pension for each £1 of net salary sacrificed if the full NI saving is paid back to them, while basic rate taxpayers receive £1.63 for every £1. Where the NI contribution isn't paid back by the employer, the amounts paid in return for every £1 of net salary are £1.69 and £1.45 respectively.
But there are pitfalls in reducing your salary in this way, as benefits such as sick pay also fall, while the amount you can borrow for a mortgage may be affected.
3 REVIEW YOUR PENSION INVESTMENTS
Millions of investors remain in funds that were once strong and reliable performers but are now in what McPherson calls the "dead zone".
"These are often invested in 'closed funds', radically altered in their underlying asset mix and seeing little future growth potential," McPherson said. "It is not a foregone conclusion that these plans should be moved to another pension plan, as they may have some valuable benefits included in the contract, such as guaranteed annuity rates, or the costs in moving out of them may be prohibitive."
A review of fund performance and your objectives may pick out some changes that could make a big difference to the value of your pension. It's also worth checking costs, with many companies levying high charges that could seriously erode the return on your investment over the long-term.
"Don't make too many changes during times of market stress as any changes will cost you to sell and repurchase," cautioned David Rankin, assistant director at Bell Lawrie. "Unless the actual fund is underperforming its peers you should think twice about making any big changes."
4 SECURE THE BEST RETIREMENT INCOME
Millions of people miss out on valuable retirement income by failing to use the open market option (OMO) to shop around for annuities, a costly mistake when the difference between the best and worst available is around 20 per cent. "Always check the market place for annuities as you will almost always be able to increase your annuity income buy moving your pension fund," advised Rankin.
For more information on the OMO, visit www.moneymadeclear.fsa.gov.uk.
Similarly, many retirees could benefit from a higher retirement income by taking out an enhanced annuity. These pay a higher income to smokers and those in ill health on the blunt assumption that the payout period will be shorter than average, yet it's estimated that around 40 per cent of those that could benefit instead have traditional annuities.
5 TAKE CREDITS
Advice promotion group unbiased.co.uk has estimated that around £2 billion in pension credits goes unclaimed each year, despite the devastating impact that inflation in particular is having on pensioner's incomes. The credits, available to anyone aged 60 or over, provide an income of at least £124.05 a week if you are single and £189.35 if you have a partner, but around a quarter of pensioners eligible for this do not claim them. For more information on pension credits, call 0800 99 1234.
The full article contains 938 words and appears in The Scotsman newspaper.
