Imagine living on roughly half your current income

It may come as something of a shock to realise that when you retire, your income could fall – perhaps by nearly half – even if you have been paying in to a pension scheme for all your working life.

The need for people, and especially younger people, to take personal responsibility for building their pension pot is becoming ever greater. This is particularly true for people in public sector pension schemes that have moved from final salary to career average benefits.

A recent survey by BlackRock* found that the average person in the UK says they would like an income of around £26,000 a year when they retire. What many don’t realise is that to generate this they will need a pension pot of £525,000, even when the state pension is taken into account.

The truth is that if you don’t make additional contributions you are likely to see your income drop significantly when you retire.

Pension – a highly tax-efficient way of saving

Pensions are one of the most tax-efficient ways of saving. Your employer pays into your pension on your behalf (unless you have opted out, which is generally not a sensible thing to do), your statutory contributions are deducted directly from your salary at source and the government tops them up.

The government tops up your contributions

You receive tax relief on the money you pay into your pension scheme. What this means is that the government gives back the tax you have paid on your contributions, paying the equivalent of basic rate tax directly into your pension pot. So if you are a basic rate tax-payer it only costs you £80 to save £100. Higher rate tax-payers can reclaim the additional tax they have paid via their self-assessment tax return.

How much can you pay in?

The maximum you can pay in to a defined contribution pension in the current tax year is £40,000. However, if you have already started drawing your pension you can only pay in up to £10,000.

Start boosting your pension pot now

  • Do not opt out of your employers’ scheme.
  • Try to pay in more than the minimum contribution each month. Set up a standing order. Even paying in just £5 or £10 a month can make a considerable difference over the years.
  • Work out how much you need in your pension pot when you retire to give you the income you need.
  • If your pension scheme is investment-based and offers a choice of investment options make sure your money is invested in funds aligned with your circumstances and objectives.

Get professional advice – one of our professional financial advisers can help you work out how much income you are on track to get from your pension and how much more you need to save to give you the chance to achieve your target income. They will look at all options, beginning with your workplace pension. Also, if you are in an investment-based pension that offers a choice of funds, they can recommend funds that are suitable for your specific requirements.

The value of your investments, and the income you receive from them, can go down as well as up, so you could get back less than you put in. A pension is a long-term investment and inflation will reduce how much your income is worth over the years. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

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