10 rewarding pension tricks and tips you probably don’t know

Despite pensions seeming complicated on the surface, they are a very straightforward concept.

You invest money on a regular basis during your working life, and the fund you accrue provides you with an income in your retirement years.

Behind that simple description, however, is a large pension industry with its own legislation, jargon, and complexity. Like many people, if you ever encounter this you could easily end up baffled and none-the-wiser in terms of how it all affects you.

To help rectify that, here’s a list of 10 pension tips and tricks to help you plan for your retirement.

1. Don’t feel you’re tied to your workplace pension scheme

According to official government figures, at the start of the pandemic in 2020 nearly 80% of UK employees were members of an employer-sponsored pension scheme.

That means that as well as making personal contributions, they are also benefiting from contributions made by their employer.

However, there may be good reasons why you might not be happy with the scheme offered by your employer. These could include:

• A limited choice of investment funds
• High charges and fees
• You may already have your own established scheme you’ve made contributions to.

There’s nothing to stop you asking your employer if they will make their contributions to your own scheme instead. They don’t have to, but if they do it means you’re keeping all your pension funds together – and building a fund you’re happy with.

2. Make sure you claim your higher- and additional-rate tax relief

The tax relief on your contributions make pension plans a great way to build a fund for your retirement.

Basic-rate tax relief is added automatically to each contribution you make, so every £80 you contribute is topped up to £100 by HMRC.

But, if you’re a higher- or additional-rate taxpayer, you’ll need to claim additional tax relief yourself. You do this via your self-assessment tax return. The sooner you claim, the soon you receive the tax relief!

Don’t forget you can go back and claim tax relief from previous years too. You can claim for up to four years after the end of the tax year in question.

3. Boost your pension fund with contributions from previous tax years

The maximum you can contribute into a pension tax-efficiently is £40,000 gross or 100% of your annual earnings, whichever is lower (in the 2021/22 tax year).

However, if you have a substantial lump sum you’d like to contribute, you’re able to “carry forward” unused allowance from the three previous tax years.

This can help give your pension fund a real boost, especially if you’re close to retirement.

4. Beware of the impact of inflation

As of February 2022, the UK inflation rate is 5.4%, with the Bank of England predicting it to reach 6% this year.

Because this reduces the purchasing power of your fund, it may well be prudent to review your investment strategy. This will help you to ensure you’re giving yourself the best possible chance of growth on your fund exceeding the rate of inflation.

Remember, however, that pensions are long-term investments. So, you should avoid any short-term decisions that could affect your investment growth over a longer period.

5. Make sure you’ve nominated your pension beneficiaries

The legal structure of pension schemes means your pension fund does not form part of your estate for Inheritance Tax (IHT) purposes. It also means that you can’t nominate in your will who you’d like your pension to pass to on your death.

So, it’s important that you complete an “expression of wish” form for all your pension arrangements. This will help to ensure that, when you die, the remaining value of your pension fund is distributed in the way you’d like.

6. It’s more than just pensions. Make the most of ISAs

You can currently start drawing from your pension fund when you reach age 55. This is set to increase to age 57 in 2028.

So, if you’re planning to retire before then, you need to have a strategy in place to provide an income before you can access your pension.

In 2021/22 and 2022/23, you have an annual ISA subscription limit of £20,000. Unlike with pensions, you don’t get tax relief on your ISA contributions. However, you won’t pay Income Tax or Capital Gains Tax when you withdraw from your ISA fund. This makes them a highly tax-efficient way to save.

Importantly, you can take money from your ISA whenever you want. This means that using ISAs can play an important part in your retirement income strategy.

7. Don’t forget pensions aren’t included in your IHT liability

As you’ve already read, the structure of pensions means they aren’t included in the value of your estate for IHT purposes.

So, it could be advantageous for your family if your retirement income strategy focuses on other sources of income first. By drawing from your other assets first – for example, shares or ISAs – and passing on pension wealth, you could reduce your IHT liability.

8. Make sure your retirement is a partnership

As well as considering your own pension arrangements, you should also consider the funds and assets your spouse or partner has accrued.

It’s likely you’ll be enjoying retirement together, so you should take steps to ensure decisions you make are joint ones. You may well have different priorities when it comes to what you want to do, so you’ll need to reflect these in your financial plan.

9. Make the most of Pension Freedoms

All the signs are that, due to a series of different factors, we’re due for a rise in the cost of living this year.

These factors include:

• National Insurance contributions going up by 1.25 percentage points from April 2022
• Inflation predicted to rise to 6%
• Pressure on the Bank of England to increase interest rates
• Fuel and energy prices going up.

If you’re already drawing income from your pension fund, you may find it necessary to take more than usual from your fund to meet rising costs.

The Pension Freedoms introduced in 2015 allow you to adjust the amount of income you take from your fund annually or even more frequently.

This means you have the flexibility to take extra out if required, and then reduce your withdrawals when you’re able to. It’s a valuable facility that helps you manage your retirement income effectively.

10. Don’t forget your State Pension

The current State Pension for 2021/22 tax year is £9,339. This will rise to £9,628 in April 2022.

It’s probably not enough to live comfortably on, but it does provide a valuable income underpin, it’s guaranteed for life, and it will increase each year.

So, you should ensure that you take it into account as part of your retirement income. There’s a government website where you can check when you’ll receive your State Pension and how much you’re entitled to receive.

Get in touch

If you need help or guidance when it comes to your retirement planning, we’ll be happy to help you.

You can email us at enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.