Fight off pension fears: 7 steps to improve retirement finances

It’s easy to be scared by pensions, with so many alarming figures about millions of people falling short of their retirement goals, billions of pounds being withdrawn off the back of rumours and speculation, and millions of people unable to work long enough to make up for the shortfall. It’s enough to persuade anyone to close their eyes to the horrors and just hope for the best.

However, opening your eyes to the risks is the first step to changing your future. If you face your demons, you can radically improve your pension prospects with some simple steps, so there’s nothing to fear from your retirement finances.

Seven steps to ease any pension fears

1. Find lost pensions

The Pensions Policy Institute estimates there are around 3 million pension pots currently gathering dust, worth £6,220 on average, so it’s worth checking if there are any with your name on them that could boost your retirement income without costing you a penny.

The government’s Pension Tracing Service is a useful tool to locate missing pensions, and some providers may also be able to help. AJ Bell, for example, has a ‘ready-made pension’ service and pension finding tool, which allows people to find pensions and combine them into a ready-made pension account.

Before transferring any old pensions, you should check there aren’t any valuable benefits attached, which you may lose, or exit charges that will be applied. Your provider should be able to tell you if this is the case.

2. Work out where you stand

Once you have found your pensions, it’s worth using a pension calculator, which lets you input your pension saving so far, your monthly payments, and your planned retirement date, and it will show you the pot you’re on track to build and the kind of income you can expect from it.

It then gives you the opportunity to tweak it to see the difference it can make if you can put a little more aside each month.

3. Make the most of pension contributions

If you’re putting money into a workplace pension, and only making the typical minimum 5% contribution under auto-enrolment rules, it’s worth checking with your employer if they will match any extra money that you pay in, up to a certain level. Many employers do offer some kind of matching alongside the typical minimum 3% contribution, and you could be missing out on extra ‘free money’ if you overlook it. If there’s nothing extra on offer from your employer, you could consider other pension options, and whether you’d benefit from the extra investment choice and flexibility of a SIPP, which you can access from age 55 (rising to 57 in 2028).

4. Boost contributions when you can

If you can’t afford higher contributions today, pledge to pay more in when you get a pay rise or work longer hours.

One way to make sure this happens automatically is to work on the basis of paying in a certain percentage of salary – so it automatically rises when your income does. However, it’s also worth revisiting your payments with each pay rise, to see whether there’s room in your budget to increase it. You can also consider one-off payments any time you receive a lump sum, whether that’s from a bonus, a gift from a family member or other lump sums like a Premium Bond win.

5. Make the most of tax-free investment growth

When you put money into a pension there are three levers you can pull – how much you pay in, how long you pay in for, and how you invest.

Most people don’t make a decision about investment, so their pension ends up in a default fund in their workplace scheme, which may be fine for the average person. However, getting to grips with investments and making active choices gives you the chance to make sure your investments are right for your needs and get your money working harder for you. In a workplace pension you’re likely to have limited choices, but in a SIPP there’s a huge opportunity to tailor your own portfolio to your long-term plans and objectives.

6. Consider tax-free cash carefully

There’s nothing wrong with taking tax-free cash at any stage, as long as you have factored it into your plans from the outset. If you need it to produce an income in retirement, it’s vital not to think of this sum separately from your overall retirement pot. The best approach is to plug your details into a pension calculator, so you can see the overall impact on your annual income if you take tax-free cash and spend it, so you know if it’s something you can afford to do.

7. Make a plan for taking income in retirement

Drawdown offers real flexibility over how much you take from your pension, and when. It also gives you the opportunity to leave the remaining pot invested for potentially more growth throughout your retirement. Plus, when you die, you can leave any unused pot to your family. However, it’s worth using an online drawdown calculator to see whether the withdrawals you want to make are likely to be sustainable.

If you opt for an annuity, you will have an income for life – regardless of how long you live. However, with a longer retirement it will be particularly important to consider inflation. Taking the annuity route also removes flexibility over how much income you can take, so you also need to think about how you would cover the cost of any one-offs. It’s one reason why people often combine annuities and drawdown, either at the same time or at different stages of life.