When planning for your retirement, you may start by thinking about the kind of lifestyle you want to lead. If you have become accustomed to a certain quality of life now, you may want to maintain that when you stop working. You might also have plans to travel, take up new hobbies, and financially support your family.
All this requires a regular income. Building your pension savings throughout your working life could mean that you’re able to draw the wealth you need to fund your lifestyle later.
Yet, according to Money Marketing, a new report from Scottish Widows found that 39% of UK adults are not on track to afford even a minimum standard of living in retirement. This is despite the fact that the projected average annual retirement income has increased from £15,500 to £17,200 since 2023.
These figures demonstrate that rising living costs could make it more challenging to save enough to fund your retirement. While you might be on track to afford a moderate standard of living, increasing your savings could ensure you’re able to achieve everything you want to in later life.
Luckily, you might be able to significantly boost the size of your retirement pot by making these three simple changes.
1. Make a small increase to your pension contributions
One of the most straightforward ways to maximise your pension savings is to increase the amount you pay in each month.
You might be cautious about changing your contributions because it would mean reducing your take-home pay. A large drop in your monthly income could mean that you find it more difficult to maintain your current quality of life and save or invest outside your pension.
The good news is, a modest change to your contributions could make a notable difference to the size of your pension pot in later life, without significantly reducing your take-home pay.
For example, figures from Standard Life show that if you earned £25,000 a year from age 22, and paid the minimum auto-enrolment pension contribution of 8% (3% employee and 5% employer) you’d have £434,000 in your pension at 66.
This assumes salary growth of 3.5% a year, 5% annual investment growth, and 1% yearly management fees.
Yet, if contributions went up by just 1%, your pension pot would be worth £488,000 – an increase of £54,000 – at 66. A 2% increase could add an additional £108,000 to your retirement savings.
While these examples are based on somebody increasing pension contributions at the start of their career, the figures still demonstrate how a small change could have a measurable effect on your retirement savings over time.
If your employer is willing to match your increased contributions, you could grow your savings even faster.
2. Ask your employer about salary sacrifice
Salary sacrifice could offer a way to potentially increase your pension contributions without a notable change to your take-home pay.
If your employer offers a salary sacrifice scheme, you can give up (or “sacrifice”) a portion of your salary in exchange for a benefit. This could include a company car, private healthcare, or pension contributions.
Normally, your employer would take Income Tax and National Insurance contributions (NICs) from your salary and pay them to HMRC. Then, your pension contributions would be deducted and you would receive whatever is left.
When you opt for salary sacrifice, your employer will reduce your salary by a certain amount and pay those funds directly into your pension. The Income Tax and NICs are then calculated based on your reduced salary.
This typically means you pay less Income Tax and NICs and your take-home pay increases. Your employer may also benefit because they pay reduced NICs too.
You might then decide to increase your contributions by a small amount to pay the additional income into your pension. This could mean you’re saving more in your retirement pot while your monthly income remains relatively similar.
Your employer may also be willing to contribute their own NICs saving to your pension too, giving your savings an additional boost.
That said, salary sacrifice could have some potential drawbacks. For instance, as your salary is technically lower, this could affect your ability to borrow or claim certain benefits in the future.
3. Review your investment choices
One of the key benefits of your pension is that your provider invests the funds for you, so your savings could grow over time.
When you first start contributing to a pension, your provider typically puts your savings in a default fund, and this might not align with your goals and attitude to risk.
Fortunately, most pension providers offer various different investment options for you to choose from. By reviewing the funds and choosing a different one, you may be able to increase the level of growth you benefit from.
Additionally, you might move your savings into a fund that aligns with your ethical values. There are many sustainable funds or those that avoid investing in weapons or tobacco, for example.
You can often change your investment choices online, or by calling your provider. This simple change might significantly increase the growth you receive each year, meaning you have a larger pot to draw from in retirement.
Get in touch
If you want to make any of these changes to your pension, we can assist you.
Please get in touch to find out how our team of VouchedFor Top Rated planners could help today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
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 performance.
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.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.