The Government recently scrapped the cap on the Pensions Lifetime allowance which means people will not be taxed the more they save – due to this you could potentially put away a lot more for your retirement
In their golden years, most Brits plan to stop working and will use the money they get from both their state pension and their private pension to get by.
With the state pension, what you get is based on how many National Insurance years you have – to get the full state pension you have to have 35 working National Insurance years. If you have fewer years, you will get less cash.
With your private pension, the amount you get is dependent on how much you – and your employer, if you have a workplace pension – put into it. This means the more you put away now then the more you will have later in life.
The Government has recently scrapped the cap on the Pensions Lifetime allowance which means people will not be taxed the more they save – due to this you could potentially put away a lot more for your retirement over your lifetime.
Here we explain three ways you can increase the value of your private pension pot – potentially by thousands of pounds.
Up your monthly pension contributions
With your private workplace pension, you could potentially up your retirement pot by £100,000 by simply upping your contributions a tad.
According to data from Standard Life, if you top up your pension contributions by 2% of your salary over the course of your working life you could add an extra £108,000 to your pension pot.
The analysis showed someone who began working full-time with a salary of £25,000 per year at the age of 22 years and paid the standard monthly auto-enrolment contribution of 3%, with a 5% contribution from their employer.
Across this persons working lifetime until the age of 66, they would then would have a pension pot worth £434,000.
If this person increased their monthly contributions by just 2% they would accumulate £542,000, even if they increased their contribution by 1% it could add an extra £54,000 pension pot boost.
For those able to up their contributions to 6% – with their employer adding 5% – then you could add £163,000 to your workplace pension giving yourself £597,000 to enjoy in your retirement. Adding another percentage point onto that at 7% could give you an extra £217,000.
Standard Life says this data is also based on a 3.5% salary growth per year and a yearly investment growth
For those wanting to go big or go home, if you up your pension contributions to 8%, then you could add an extra £271,000 to your retirement pot.
Taking advantage of pension allowances
Everyone in the UK has an annual pension allowance which is the maximum you can pay into your pensions in any given tax year.
In the spring budget, the Chancellor increased the pensions annual tax free allowance to £60,000 from £40,000 which means you can now pay £60,000 into your pension each year.
Any unused allowance from the previous three tax years can be “rolled over” to the current year. So if you paid £20,000 a year into pensions for the past three years, then this year you could contribute a total of £100,000 – which is this year’s £40,000 plus £60,000 carried over.
So if you have not taken advantage of this allowance over the last few years – particularly since the introduction of the latest allowances – it could be a very good way to boost your pension pot.
Boost your savings with tax relief
Everyone’s entitled to tax relief when they pay into a pension, even non-taxpayers. Each payment you make into your pension benefits from 20% tax relief – this is even higher at 40% if you’re a higher-rate taxpayer and at 45% if you are an additional rate taxpayer.
You should be aware, however, that in Scotland, there are different income tax rates so pension tax relief is applied in a slightly different way
According to Aviva, if you’re a basic rate taxpayer, for every £100 you put into your personal pension, you’ll get £25 tax relief, giving a total contribution of £125.
Most workplace pensions, which are known as occupational pension schemes, take your contributions from your monthly earnings before tax is deducted. With this, you’ll automatically receive all the tax relief you’re due upfront.
If you’ve set up your own pension, the contributions you make are usually treated as coming from your after-tax pay. Your pension provider will claim back basic rate tax at 20%, and add this to your pension pot.
This tax relief will allow you to build up your private personal pension pot a little faster.
