If you're in your 50s or 60s with no retirement savings, you may be clinging to the adage that 'it's never too late to start'. While this may be true, you need to be smart to make up for lost time. Here's our top 10 pension boosting tips for late starters
With people living longer and longer, and the demise of final salary pension schemes, you may be looking at your retirement provisions and realising that they're less healthy than you thought.
But all is not lost, while time may not be on your side, there are still a number of ways you can bolster your retirement income so you get to spend your golden years as you’d like to.
1. Set a target retirement income
Before you start looking at investment strategies or different pension schemes you should first establish how much money you will actually need for a happy retirement.
Various experts quote anywhere from 25% - 100% of your salary as a suitable retirement income, however in reality the amount you’ll need will vary hugely based upon your individual situation.
Although you may not be able to accurately predict your financial circumstances in 10-15 years time, you should have some idea the major outgoings you’ll face and how much you tend to spend on general living costs.
Will you have a mortgage or rent to pay in retirement? Will you have any dependants to support? Will your partner still be at work earning an income? All these factors can affect how much money you’ll need.
2. Find out where you are now
Now you have a rough idea of the level of income you’ll need when you stop working, the next step is to find out the value of your existing retirement plans and savings.
Ask your employer and contact previous employers to check if you have contributed to a pension scheme while working for them. If you find that is the case then ask for an estimate of what your fund might be worth when you plan to retire.
If you think that you may have paid into a private pension scheme but have misplaced the details or cannot contact your employer, then you can use the government’s Pension Tracing Service.
The Pension Tracing Service has access to thousands of personal, public and stakeholder pensions and can help you track down your lost pensions free of charge so is really worth contacting them.
3. Don’t forget the state pension – check you NI contributions
Although many people feel that you shouldn’t rely on the state to fund your retirement, overlooking the state pension entirely could give you a false picture of your potential retirement income.
A state pension, together with tax credits or a second state pension could still form a large part of your income after you finish working. However, exactly what you’ll receive will vary depending on the number of years you’ve made the minimum level of National Insurance contributions.
Each year the HMRC looks at the amount of National Insurance you’ve paid and if you’ve paid the minimum amount required it considers this to be a ‘qualifying year’ that can be put towards your benefit entitlements.
Both men and women now need to make a total of 30 ‘qualifying years’ of National Insurance contributions to receive the full state pension. Beyond that any National Insurance payments you make are used to increase your second state pension.
You can request a State Pension Forecast to get a more accurate picture of what you might get in the way of a state pension.
If you find that you are some way short of reaching the 30 qualifying years you need for the full state pension, you may be able to top up your contributions by making extra payments – at the time of writing each qualifying year is worth approximately £177 in annual retirement income.
However, you can only ‘top up’ missed contributions from the past 5 years with the deadlines passing every April.
Read our guide Should I Make up my National Insurance Contributions? for more information or contact your nearest Citizens Advice Bureau for help deciding if topping up your NI contributions is worthwhile.
4. Set a budget
Once you have a more accurate picture of how much you need to save to meet your target retirement income - the next step is to establish just how much you can put aside each month.
Drawing up a budget to assess your monthly income and expenditure should give you a better idea of just how much you can afford to set aside. It may also mean that you can boost the amount you have available to save by cutting costs elsewhere in the process.
For more help try following our Action Plan How to stick to a Budget .
5. Play the tax game
Pensions
Once you know how much you can afford to contribute to your retirement savings each month, you need to decide which retirement saving option is best for your circumstances - this will to some extent depend on tax.
Paying into a pension scheme gives you tax relief designed to encourage you to plan for your retirement. This is especially the case if you are a higher rate tax payer where the relief you would receive on pension’s contributions could be up to 40% - meaning to save £100 into a pension each month you would only need to actually pay in £60.
However, the relief limits are designed to encourage long term pensions saving as the amount of pension relief you can receive in this way is limited to your annual income or £3,600, whichever is greater.
There are also limits to the amount you can put into your pension tax free, for 2012/13 this stands at £50,000. Any money you pay in above this will be taxed at your standard rate.
If you are a late starter you need to consider these limits when considering if a pension is your best option, as you may not be able to make up for lost time by saving extra.
Try our Action Plan How to get a pension for a step by step guide to getting started.
However some new rules brought in by the coalition government in 2011 may also benefit late pension savers.
While your 'lifetime allowance' - the maximum value you can have in your pension fund tax free - is being cut from £1.8 million to £1.5 million. If your total pension fund is less than £18,000 (this figure will raise with inflation) you can take the whole amount out in cash – with 25% tax free between the age of 60-75.
This means that not only would you have not paid income tax when you contributed to your fund but wouldn’t have had to pay it when you take it out either.
This change is especially relevant to late starters as even if you have only a few years left to work it makes a pension more attractive and flexible.
Consider ISAs
If you have only a few years left until retirement then you may want to keep your money more accessible.
As with pensions there is also a limit to the amount you can put into an ISA each year called your ISA allowance. For 2012/13 this is set at £11,280 of which up to £5,640 can be saved in cash.
Using your ISA allowances allows you to invest in stocks or shares, or save in cash and keep everything you make – tax free. You can also use any money you save into an ISA to purchase an annuity to generate a retirement income if you choose to.
However you don’t get tax relief on the money you save into an ISA in the same way as a pension - meaning you will have paid income tax & NI on the money before you save it.
For more information try following our Action Plan: How to grow your savings.
Other choices
Although pensions and ISAs are the most popular methods of saving for retirement, if you have little time until you finish work you may want to consider other choices. Fixed rate bonds are a low risk way of getting a return on your money for a set period and if you have a fixed lump sum to put towards your retirement could be a another option.
All about time
Before making your final decision on how to save for your retirement you need to consider the amount of time you have left until you retire.
If you have only as few years until you plan to stop working then investments or pensions are unlikely to be the best way for you to save as these are more long term strategies.
Equally if you have between 5-10 years left to work pensions and investment ISAs become a more suitable method of saving for retirement although you may want to carefully monitor the level of risk you are exposed to as you would have little time to re-coup any losses.
If you plan on working for more than 10 years then you will have more flexibility still and should consider pensions and investments as a means of growing your retirement savings.
Spread your bets
Even if you are late comer when it comes to saving for your pension it doesn’t mean that you have to choose just one route.
There is no reason that you shouldn’t split your money between a pension and an ISA, in fact if you are a high earner then you may benefit from using up your tax limits in both.
Spreading your bets in this way will also ensure that your retirement income isn’t reliant on the performance of a single retirement product, meaning you are exposed to less risk overall.
6. Start saving ASAP
Once you have a clearer picture of your current circumstances and pension/ISA options don’t delay.
With only a limited time to save for retirement every month counts and will boost the impact of compound interest of your pension fund or ISA. As soon as you’ve made your decision open your account and begin saving.
7. Look at your other assets
If you haven’t actively saved for your retirement you may still find that there are ways you could generate an income once you stop working.
For people aged over 50, one of the most likely sources is the value of your home. House prices have soared over the last 30 years meaning that many people have considerable value in their homes that could be used to fund their retirement.
There are two main methods of releasing this money: downsizing and equity release; however neither should be taken lightly.
Downsizing
Simply put, downsizing is the process of selling your home, buying something cheaper and pocketing the cash difference.
Whether this represents a viable option will depend on a number of factors, primarily if you are happy to move home or want to stay put.
For many people the family home is a treasured possession that they couldn’t bear to leave, for others a smaller, more manageable property in retirement is ideal – especially given the lower running costs freeing up more money to save for later on.
Equity Release
If downsizing is not an option then you may want to consider an equity release scheme. This works by releasing some of the value in your home without the need to sell your property.
However, this type of scheme is often quite expensive and you would ultimately mean that you no longer own all of your home and may not be able to leave it to your family in your will.
What’s more, generating a retirement income through an equity release scheme may also affect any benefits you would be entitled to receive from the state in retirement.
So if you are considering this as an option to support yourself in retirement it’s important to seek advice before signing up.
For more information on equity release schemes and the costs involved, read our guide What is equity release?
8. Pay off your debts
Retiring in debt is never an ideal scenario as it means that money you’ve saved is wasted paying banks and credit card companies - so you need to make every effort to clear it ASAP.
This is especially important if you are approaching retirement with little in place to support you once you stop working. Ensuring that you pay off all or as much of your debt as possible before you finish work is a simple way to make your ‘actual’ income greater in your golden years.
The most significant of these debts is likely to be your mortgage, if you are still paying off your mortgage check exactly when it’s due to finish and consider over-paying to reduce the term if you find you will still be paying in retirement.
For more tips and a step by step guide, follow our Action Plan How to pay off your mortgage early, or try our Action Plan How to clear your debts for more help and resources to ensure you’re debt free by retirement.
9. Consider postponing retirement
Although not a popular choice, delaying your retirement by as little as 12 months could have a significant impact on your retirement income.
Putting off your retirement could boost your income through better annuity rates, compound interest growth, and the chance to make extra personal contributions.
Deferring your state pension will also mean that the amount you receive when you do retire will increase. Additionally if you do decide to continue working beyond state pension age you no longer have to pay any National Insurance, meaning you keep more of the money you earn.
10. Seek advice
If you are left feeling uncertain what is the best course of action to take you should seek advice from an independent source.
Although the tips above can give you an indication of the areas you need to look into, an Independent Financial Advisor can help you assess your financial options or a member of staff at your nearest Citizens Advice Bureau can guide you through your state pension options.
