Spring is coming, so now could be a good time to clean up our finances. Making some small changes can bring big benefits to our pensions in the future. Making sure you have claimed the right amount of tax relief on your contributions or tracking down a lost pension might not take up too much time, but could leave you better off.
When it comes to taking a retirement income, shopping around can give your income a huge boost, giving you much more spending power than you thought.
Here’s five steps to help make the most of your pension.
Remember, pension and tax rules can change, and benefits depend on your circumstances. You also can’t usually take money out of a pension until at least age 55 (rising to 57 from 2028).
This article isn’t personal advice. If you're not sure if an action is right for you, ask for financial advice.
1. Use your allowances
Right now, you can pay either your annual earnings or £60,000 into your pension each year, whichever is lower, and still get tax relief. You can also carry forward any unused allowance from the past three tax years to boost your contributions further.
So, in the current tax year, you can add up to £180,000 to your pension, as long as you earn at least this amount and haven’t used your previous years allowances.
But it’s worth checking how these rules apply to you. If you’re a high earner (over £260,000 per year) you could be hit by the tapered annual allowance. This reduces how much you can pay into your pension to a minimum of £10,000.
Also, if you’ve already flexibly accessed your pension and want to keep contributing, the Money Purchase Annual Allowance (MPAA) kicks in and limits you to £10,000 per year.
Read more about your allowances
2. Claim your tax relief
Basic rate tax relief is usually added to pension contributions automatically, so you don’t need to claim it. But, if you pay income tax at the higher or additional rate then you might need to claim the extra tax relief, if your provider doesn’t already do this for you.
Check with your pension provider if your pension is set up as a net pay arrangement or relief at source. If it’s a net pay arrangement, then you won’t need to do anything. Your pension contribution is deducted from your salary before income tax is paid, and your scheme claims back tax relief at your marginal rate of income tax. You also don’t need to claim if you are in a salary sacrifice arrangement.
However, if it’s set up as relief at source, as a lot of private pensions, like SIPPs and some workplace pensions are, then you will need to claim the extra tax relief through self-assessment.
This is because contributions are deducted from your salary after tax. The employer takes 80% of the contribution from the employee’s salary and then reclaims the extra 20% from HMRC. So, if you’re entitled to tax relief at a higher rate of 40% or 45% then you need to claim it.
3. Can your employer pay more?
Many employers set their pension contributions at the auto-enrolment minimum of 3% but there are others who pay more if you also raise your contribution.
It’s called employer matching and can mean a relatively small uplift in your own contribution can lead to a much bigger overall boost to your pension.
4. Consolidate
It’s easy to lose track of old pensions but this can have a big impact on how much you end up with in retirement.
Start by making a list of your previous employers and making sure you’ve got pension paperwork for each one. If you’ve lost track of a pension, contact the government’s Pension Tracing Service. If you give the name of either your employer or the pension provider, they can give you the contact details. Once you’ve rounded up all your pensions, you can consolidate them under one roof.
Having one place to see what you’ve got, can lead to better retirement decision-making as well as saving you money and admin. However, it’s important to make sure you aren’t giving up any benefits by consolidating – like some older pensions that have guaranteed annuity rates attached which can boost your income.
You also need to check you aren’t incurring any expensive exit fees.
More on consolidating your pensions
5. Shop around for your retirement income
If you’re in the market for an annuity, it pays to shop around. Once you’ve bought an annuity, it can’t be undone. So it makes sense to search the market for the best deal.
A search on Hargreaves Lansdown’s annuity quote engine showed a difference of around £450 per year between the different quotes for a 65-year-old with a £100,000 pension. Over the course of a 20-year retirement you could be missing out on £9,000.
If you have a health condition, then you might also qualify for an enhanced annuity which gives a higher income so it’s worth taking the time to check what’s out there.
Editor's choice: our weekly email
Sign up to receive the week’s top investment stories from Hargreaves Lansdown
Please correct the following errors before you continue:
Hargreaves Lansdown PLC group companies will usually send you further information by post and/or email about our products and services. If you would prefer not to receive this, please do let us know. We will not sell or trade your personal data.