It is safe to say that as we approach retirement, we tend to take a more cautious approach to our investments, often looking to consolidate rather than maximise. This traditional switch from active to passive investor is understandable, but there are ways and means of building wealth in your later years. You will often find several relatively small actions combined can have a significant impact on your long-term wealth.
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For many people, pension income will be their primary source of income in retirement. There is a general misconception that you need to take a more cautious/passive approach to your pension assets as you approach retirement. Yes, you need to be careful and protect them, but there are still ways and means by which you can maximise your pension pot.
Defer your pension
Unless there are significant medical issues, it is improbable you will be able to access your private pension before 55. Currently, men and women will be eligible for their state pension upon their 66th birthday, although this is forecast to increase to:
- 67 between 2026 and 2028
- 68 between 2037 and 2039
While recent pension regulations allow you to defer private pension payments, many people are not aware that you can do the same with your state pension. If you delay your state pension, you will receive enhanced payments when you eventually decide to claim. This is especially useful for those working in later life, as their employment income and pension income are considered when calculating their income tax.
Top up your national insurance contributions
To receive the maximum state pension, you will need to have made national insurance contributions for a total of 35 years. Due to gaps in employment, family commitments and other issues, many people will fall short of the maximum contributions. However, as you approach retirement, it may be worth considering making voluntary national insurance payments.
These are referred to as voluntary class III contributions or voluntary class II contributions for low-income or self-employed people. At this moment in time, you can pay voluntary contributions covering gaps over the previous six years. As pension regulations continue to change and evolve, there are specific rules for different age groups, and you may be able to make additional payments.
The following table will give you an idea of the different levels of voluntary national insurance contributions:
|Tax year||Weekly contribution||Annual contribution|
It is important to take financial advice if you are considering topping up your national insurance contributions. An adviser will compare and contrast the cost of topping up your contributions against the perceived increased pension benefits.
Private pension carry forward rule
There is a similar scenario when it comes to private pensions and unused pension contributions from previous years. At this moment in time, you will receive tax relief on pension contributions up to 100% of your salary, capped at £40,000 gross for 2021/22. This is referred to as the “annual allowance” and, if exceeded, you would not receive tax relief on contributions over £40,000.
If, for example, you had a significant level of savings as you approached retirement and you had unused pension contribution tax relief, then it could be worth considering backdating your pension contributions. This can provide a significant boost to your pension fund, enhancing your income in the future. As a rule of thumb, for basic rate taxpayers, HMRC will add £25 for every £100 you contribute to your pension plan. Those on higher rates of tax will also be able to claim additional relief through self-assessment tax returns.
Organising your pension assets
There are numerous ways and means of enhancing your pension pot and also increasing your state pension. In the case of a private pension, a simple diversion of savings into your pension pot within your annual allowance would produce an immediate increase of at least 20% (government tax rebate). The earlier you start your pension contributions, the more potential for long-term capital appreciation. Even if you start your contributions at a relatively low level and increase in line with your income, the long-term benefits can be significant.
Since the US mortgage crisis of 2009, worldwide interest rates have remained at historic lows. While the Bank of England recently suggested UK rates will start to tick slowly higher, this could be up to two years away, and any upward movements will be gradual. Consequently, to enhance your savings, it is vital to take advantage of any tax-efficient vehicles. There are numerous options to consider, such as:
Help to Save Scheme
The Help to Save Scheme was introduced by the UK government in 2018 to assist those on a low income. Eligibility is relatively straightforward, and you can apply for a Help to Save Account if you:
- Receive working tax credits.
- Have a nil award for working tax credits but receive child tax credits.
- Claim universal credit and earned a minimum of £617.73 during your last assessment.
While there are obvious benefits in retaining your Help to Save Account, it is important to remember you can withdraw your funds at any time. You can only apply for one Help to Save Account per person, and they last for a maximum of four years. Under the terms of the scheme:
- You can save between £1 and £50 a month.
- You are not obliged to make savings each month.
- You cannot top-up missed payments.
- After two years you will receive a 50% bonus payment, based on the highest balance during the period.
- After four years, you receive an additional 50% bonus, based upon the difference between the highest balance during the first two years and the highest balance during the final two years.
For example, if you made the maximum £50 contribution per month, the bonus payments would be:
|Period||Maximum balance||Bonus payment|
|Initial two years||£1200||£600|
|Final two years||£2400||£600|
So, if you were to make maximum savings contributions over the four years, your accumulated contributions of £2400 would be increased by £1200 to a total of £3600. Not a bad return!
In April 1999, the UK government introduced ISAs (Individual Savings Accounts) to replace PEPs (Personal Equity Plans). These are effectively accounts for your savings/investments, which are tax-free forever. The ISA allowance for the tax year 2021/22 is a maximum of £20,000, which is available on a "use it or lose it" basis. However, it is not difficult to see the potential to shield significant amounts of money from both income tax and capital gains tax in the longer term.
There are numerous different types of ISAs which include:
Except for the Lifetime ISA, which was introduced as a tax incentive to help those looking to acquire their first home, there is no tax relief on contributions. However, as we touched on above, the ability to shield significant amounts of money from income and capital gains tax could be priceless in the future.
While we have seen numerous investment schemes come and go, highs and lows in the stock market and various tax incentives for those approaching retirement, for many people, property has been the key to their wealth. It is easy to forget that we have seen a considerable increase in property prices since the 1950s.
A Sun Life article makes for fascinating reading and perfectly demonstrates the increase in UK property prices:
|Year||Average house price|
Source: Sun Life
While these figures in isolation show the considerable increase in property wealth since the 1950s, it is important to consider inflation. Using Bank of England inflation data, we can calculate the following inflation-adjusted figures:
So, based on inflation between 1950 and 2020, the average house price should have increased from £1891 up to £66,265. However, we know that the average house price in 2020 is £245,443, an additional increase of £179,178. Consequently, many people approaching retirement today are living in their most valuable asset.
Downsizing your property
When you are approaching retirement, often with your mortgage paid off and your children have flown the nest, it might be time to consider downsizing. Moving into a smaller property could release a significant amount of capital from your existing property. There are numerous benefits to downsizing, which include:
- Reduced living expenses such as heating and council tax
- Use funds raised to pay off high-interest debt
- An increase in social activity
While the potential saving on living expenses may seem relatively small, these are additional funds you can use elsewhere. We will look at using funds raised to pay off high-interest debt in the following section.
Clearing your debts
Before we look at the issue of using savings to clear high-interest debt, which will bring about a net increase in your long term wealth, it is worth looking at current average interest rates:
|Savings rates (instant access)||0.19%|
|Personal loan rates||4.6% to 7.6%|
|Credit card rates||25.3%|
|Payday loan rates||Up to 1500%|
Many people fail to realise, but with inflation at just 1% and average savings rates under 1%, the relative spending power of your savings is decreasing day by day. When you compare average savings rates to those for personal loans, credit cards and payday loans, perhaps these funds could be better used elsewhere?
If, for example, you have recently downsized your property and you’re mortgage-free, it may be sensible, where possible, to use part of these funds to pay off high-interest debt. While it may not feel as if this is increasing your net wealth, it reduces your interest charges as we advance and, in effect, improves your financial position.
At this moment in time, experts believe that UK base rates will remain relatively low with just a minimal upward tick expected over the next two years. When you also consider that inflation, currently 1%, is expected the spike at more than 2% in late 2021 before levelling off at 2%, this again highlights the problem of maintaining savings while financing high-interest debt.
You will need to consider your short, medium and long-term financial needs and work out whether you have surplus funds you can use to repay outstanding debts. It is a case of finding a balance between your financial requirements, the excessive interest rate charged on many types of personal debt, set against minimal savings rates.
We live in a world where technology leads us by the hand, dominates our lives and should, in theory, make life "easier". However, an article in the Guardian dated June 2019 casts a surprising light on benefits remaining unclaimed by a million pensioners. The report highlights the fact that:
- Between 2017 and 2019, there was £7 billion in unclaimed pension credits
- This accumulated figure is set to increase to £17 billion by 2022
- Those failing to claim their pension credits paid an extra £10 million on BBC TV licence fees
An article on the In Your Area website highlights a report suggesting there is more than £50 billion unclaimed/lost money in the UK. Many of these funds are held in:
- Dormant savings accounts
- Forgotten bank accounts
There is a new website called Gretel, which aims to reconnect those who have lost track of bank accounts. You can also trace old pensions you may have lost track of using the UK government pension tracing service. Then there is a helpful service offered by Experian, which allows you to trace lost money across a range of UK financial institutions.
Secure your future with a financial adviser
While many people may look at issues such as lost bank accounts, insurance policies and other investments and wonder how this can happen, it is relatively easy. You may have moved home a few times, held various employment positions, and maybe previous employers have gone out of business, changed name or moved.
Many people underestimate the importance of the services offered by financial advisers, especially when you undertake an annual review of your assets. This means that you have at least one opportunity per year to review your investments, trace outstanding monies and, as we have shown above, utilise your money in different areas to attract tax benefits and enhanced returns.
Those who create the most robust foundations for financial wealth are those who plan ahead, even starting with relatively modest pension contributions at an early age. These are the foundation from which to enjoy the benefits of long-term capital appreciation. However, just because you are approaching retirement does not mean you can’t be proactive with your investments, pension assets and savings.