12 million people “undersaving for retirement”: here are 3 ways to boost your pension fund

Building a healthy retirement fund ensures that you have enough income to fund your lifestyle when you stop working.

However, a recent report from the Department for Work and Pensions (DWP) has found that 12.5 million people are potentially undersaving for retirement.

Although auto-enrolment has done a lot to improve pension participation, many people are still not contributing enough to be able to live a comfortable lifestyle when they retire.

Indeed, the DWP say that 88% of working-age people are undersaving when measured against the Pensions and Lifetime Savings Association’s (PLSA) comfortable retirement living standard.

Fortunately, you can rectify this by making some basic changes to your financial plan. Here are three ways you can boost your pension fund.

1. Increase your contributions when your earnings increase

Increased earnings are always good news because they create new opportunities for future planning. Having additional income may mean that you can contribute more money to savings and investments now so, if your earnings rise, increasing pension contributions can be a sensible move.

However, This is Money found that only 1 in 100 people increase their pension contributions after a 10% pay rise.

Many people rely on a pay rise boosting their pension contributions at the existing percentage, but it may be much better to increase the percentage of your salary that you pay too. As well as giving your savings a boost, many employers may be willing to match your contributions at a higher percentage, meaning you can potentially accrue even more pension savings.

You may also be affected by “lifestyle inflation” after your earnings increase. This is the tendency to increase spending on luxuries as your income rises, which could mean that only a small portion of the additional income goes towards your savings.

Increasing the percentage of your income that you pay into your pension when your earnings rise is a simple way to ensure that the extra income goes towards building your retirement savings. Even a small increase could significantly boost your savings without making a noticeable difference to your income.

2. Claim all the tax relief you’re entitled to

Money that you contribute to your pension pot usually receives tax relief, but you may be missing out on valuable additional savings if you don’t claim all the relief you’re entitled to.

The amount of tax relief you benefit from depends on your Income Tax band. You may be able to claim:

• 20% if you are a basic-rate taxpayer
• 40% if you are a higher-rate taxpayer
• 45% if you are an additional-rate taxpayer.

In practice, this means that a £100 contribution to your pension “costs” £80 for basic-rate taxpayers, £60 for higher-rate taxpayers, and £55 for additional-rate taxpayers. But, in certain cases, you need to claim a portion of your tax relief if you are a higher- or additional-rate taxpayer.

Most pension schemes use the “relief at source” system. Here, only the basic-rate tax relief of 20% is applied automatically. You need to claim the additional 20% or 25%, depending on whether you are a higher- or additional-rate taxpayer, through your self-assessment tax return.

However, many people are failing to claim this valuable additional relief.

Research from MoneyWeek found that there was £1.3 billion in unclaimed tax relief between the 2016/2017 and the 2020/2021 tax years. Higher-rate taxpayers had left behind an average of £245 million in pension tax relief each tax year.

This may be because people misunderstand how tax relief is applied and they do not realise that they are entitled to more relief than they are currently receiving.

Fortunately, this means that you may be able to increase your retirement fund simply by claiming all the tax relief that you are entitled to.

It may be worth speaking to your pension provider to find out exactly how tax relief is being applied. If you do need to claim it, you can do it through self-assessment if you already file, or by contacting HM Revenue & Customs (HMRC) directly.

3. Review with a financial planner

The report from the DWP is alarming and you may be concerned that your retirement savings will fall short. However, the good news is that if you act now, you can adapt your retirement plan and ensure that your savings match your desired lifestyle.

The first step is to understand the position you are currently in, and reviewing with a financial planner can help you determine whether you are saving enough for retirement.

Cashflow modelling can help to forecast how much you are likely to have saved by the time you decide to stop working, and whether this will be enough to sustain your desired standard of living.

Your planner creates a unique model of your future finances based on your income, assets, how much you are saving, predicted investment returns, and your average spending.

It may also help with predictions about your finances if you require long-term care, and give you an indication of what you will be able to leave to your family.

You may also be able to use cashflow modelling to “rehearse” different retirement scenarios. For example, how would your finances be affected if you moved your chosen retirement date, decided to travel more, or increased your pension contributions now?

Get in touch

If you are concerned about your retirement plan and you want to explore ways to potentially increase your savings, please get in touch. Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.