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Highlights
- Planning for retirement is one of the most important investment strategies to build a pension pot together with savings, investments, and other assets.
- In 2021, the UK government suspended the triple lock on the state pension for one year that offers protection against inflation.
Planning for retirement is one of the most important investment strategies to build a pension pot together with savings, investments, and other assets so you don’t face financial difficulties in your old age. It’s important to have several income streams for when you leave your work and take retirement. Your pension pot is the total amount of pension contributions you and your employer make to save for your retirement.
The state pension age is the earliest age a person may start receiving their state pension amount. Currently, the state pension age is 66 years, and under the existing legislation, the state pension age will rise to 67 for those born on or after April 1960, before it increases to 68 between 2044 and 2046 for those born on or after April 1977. Last year, the UK government suspended the triple lock on the state pension for one year that offers protection against inflation.
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The first step to start planning for retirement is to know how much you’ll need to live on and then you can start setting your savings goals to build a suitable pension pot. It is important to keep track of your contributions and overall pot to know if you are on track to achieve your retirement goal.
State Pension to rise in April
Lat year, Prime Minister Boris Johnson breached his promise in their 2019 manifesto to continue raising the state pension in line with 2.5%, average earnings and the annual inflation rate, whichever is greater, by suspending the triple lock for 2022-2023.
However, Department for Work and Pensions (DWP) has recently confirmed that the state pension will rise by £290 (3.1%) in April and be based on Consumer Price Index figure from September 2021. But recently the Bank of England has predicted that inflation could hit 7.25% in April, which could worsen the situation for pensioners as they may see a real-term loss of 4.15% in the amount of state pension. This means from April, the basic state pension will increase by £4.25 to £141.85 per week and £7,370 a year and the full flat rate will increase by £5.55 to £185.15 per week and £9,630 a year.
Let us look at the five pension tips to give your retirement a boost.
- Increase your contribution
The more you contribute to your pension at an earlier age, the more your pension pot will grow, all thanks to the power of compounding. So, try to increase your monthly pension contribution and if you are in a defined contribution workplace pension, even just a 1% increase in your contribution can make a huge difference as your employer may match your contribution. Further, any extra contribution to pension gives you a tax relief until you don’t exceed the annual allowance.
© 2022 Kalkine Media®
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- Use tax relief to top-up your pension contribution
The more you contribute to your pension, the more tax benefit you will receive, depending on the rate of income tax you pay. This can top-up your contributions by a further 20-45%. Depending on your income tax rate there are two different levels of tax relief: basic-rate taxpayers and higher rate taxpayers. For the basic rate taxpayer, 20% is added to the pension contribution, and for higher rate taxpayers 40% is added to the pension contribution. You can claim back another 20%-25% in tax relief through tax return.
However, there is a speculation that the tax relief on higher rate taxpayers’ pension contributions can be limited. In case, you make a contribution in self-invested personal pension (SIPP), the basic tax relief is claimed automatically.
- Diversify your portfolio
Diversification is one of the most important investment strategies to mitigate risk and maximise risks by allocating investments across various financial instruments, assets, industries, and other categories. Diversification strategy depends on your age and ability to take risk. If you are younger, you may choose higher growth strategy with high risk as they have time to recover from any losses. However, if you are in your 50s or 60s, you may opt for a low-risk strategy, so that your contribution is not hit by a bearish and volatile market.
- Pay in parts
The best way to boost your retirement income is to contribute in lumpsum when you have some cash. The UK government will also offer top-up on your lump-sum contribution up to a certain limit and the power of compounding will grow and potentially give you a much larger pension. But you need to remember that you can’t withdraw your contribution amount until reach the state pension age of 66.
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- Invest in SIPP to get complete control
If you want to take control of choosing and managing your investments for retirement you may choose a self-invested personal pension (SIPP). Some employers may also contribute to your SIPP rather than the workplace pension that you can easily manage. However, before choosing any SIPP consider fees as it can erode the value of your contributions and choice of your investments as with SIPP you may invest in a wide range of assets such as shares, bonds, ETFs, Mutual funds, bonds, and investment trust.
Note: The above content constitutes a very preliminary observation or view based on industry trends and is of limited scope without any in-depth fundamental valuation or technical analysis. Any interest in stocks or sectors should be thoroughly evaluated taking into consideration the associated risks.
