People who have saved into a private pension are better off to the tune of £10,000 a year on average, according to a new study carried out by the Office for National Statistics.
In 2016, retired households with private pensions had an average disposable income of £27,807, compared to £17,229 for those without a private pension. That represents a 21% increase on 2015, when the difference in disposable income between those with and without a private pension was £8,773.
The study analysed retirement incomes of households over the past 40 years, and revealed that private pensions now make up the bulk of people’s retirement incomes. In 1977, just a quarter of people’s total retirement income was made up of private pensions. Fast forward to 2016, and it now makes up 43%.
And despite the state pension rising rapidly over the past six years thanks to the triple-lock, it now makes up 38% of people’s retirement income, compared to 53% some 40 years ago.
So, what can you do to boost your private pension income in retirement? Here are five ways to maximise your pension and make the most of your retirement income.
1. Increase your pension contributions
It may seem fairly obvious, but increasing your contributions can have a big impact on the overall level of savings you have when you retire.
A 30 year old aiming to retire at age 65 could increase their annual pension income by more than £1,000 a year by increasing their pension contributions from £20 to £50 a month, according to Hargreaves Lansdown’s pension calculator. Upping contributions to £100 per month would increase the same person’s annual retirement income by almost £3,000 a year.
2. Ask your employer about a pension-matching scheme
People aged 22 and over and earning more than £10,000 a year are now automatically enrolled into their employer’s workplace pension scheme. They currently have to contribute 1% of their salary per year, and their employer must contribute 0.8%.
However, in June, Which? reported on the pension schemes that will match contributions if you choose to increase yours. Large employers including Vodafone and BAE systems offer pension matching schemes, which see companies increasing their contributions to your pension as you do.
Research from Royal London suggests that around 3.2 million people are failing to take up this offer – missing out on additional contributions of £2bn, and losing out on an extra £650 of income every year.
3. Get to grips with the free pension top-up from the government
Not only do people benefit from free money from their employer when they pay into a pension, they also get a free top-up from the government in the form of pension tax relief. The tax relief you get depends on how much you earn.
- Basic-rate taxpayers get 20% tax relief
- Higher-rate taxpayers get 40% tax relief
- Additional-rate taxpayers get 45% tax relief
The basic relief is added to your pension contribution, so a £100 contribution to your pension only actually costs £80. Depending on the type of scheme you have, some higher earners will have to claim tax relief back on a self-assessment tax return, further reducing your tax bill for the year.
You can find out more in our guide to pension tax relief
4. Unused pension allowances from previous years can still count
Each year, most people can pay as much as £40,000 into their pension, or 100% of their salary, whichever is lower. This is called the annual allowance.
However, if you have unused allowances from the previous three years, you can use these up, meaning that in one year you could pay in as much as £160,000, on which you can earn tax relief. This process is called ‘carry forward’.
There are caveats – you still cannot pay in more than your annual income, but this can be useful for people who have come into a large chunk of money – perhaps through a time-dependent bonus or the sale of a company.
Find out more in our guide to the pensions annual allowance.
5. Consider consolidation to keep more pension profits
Over the course of your career, you could build up a number of pensions with a variety of companies. Consolidating these into one private pension – often into a product called a self-invested personal pension (Sipp) – can be useful. You may be able to reduce charges, and will be able to select your own investments to better suit your retirement plans.
There are risks with this – you need to check that you won’t face exit penalties on the other schemes you’ve saved into, or lose valuable benefits, such as guaranteed annuity rates, which pay a higher income than today’s standard annuities.
Find out more with our guide to pension consolidation.
How much do I need for a comfortable retirement?
Retirees typically need an income of £26,000 a year to have a comfortable retirement, as we revealed in an investigation earlier this year. This is enough to cover the essentials, as well as affording holidays and other luxuries in retirement.
We found that a couple in their 20s must save £131 a month to generate a £26,000 a year income, while those in their 40s must put away £198 per month.
Find out more in our guide to how much you need to save for retirement.