Three tips to get the most from your pension pot

Pensions come with generous tax perks to help you save for retirement, but people sometimes make mistakes that could lose them extra money in their pot.

1) Keep track of your pensions

Pension admin can easily slip down a growing to-do list but checking in on your pension (or pensions) could end up saving you hundreds, if not thousands, of pounds in the long run.

Auto-enrolment has successfully boosted how much we’re paying into pensions, but it’s also easy to end up with more pots than you can keep track of. The Government estimates the average person has 10 or 11 different jobs in a lifetime, which potentially means building up 10 or 11 different pension pots.

Even if you already know where your old pensions are, it’s a good idea to see how they are doing and think about combining them.

Combining pensions can put you in the driving seat to make better decisions about your future. This could be whether you need to pay in more money now or simply by reducing your costs. Different pension companies charge different amounts for managing and investing pensions. Combining your pensions may mean you can choose the right-priced plan and pay far less in charges over time.

The impact of reducing your pension charges can be significant over the long term. AJ Bell figures show that someone combining three pensions with charges of 1.5% to 0.75% could boost their pension pot by over £7,000 over 10 years or £20,000 over 20 years if they were to switch to a single, lower cost account.

Find out more about combining your pensions, including AJ Bell’s Ready-made pension service.

2) Claim back extra tax relief

Lots of people don’t know that they might need to claim for extra pension tax relief in certain types of pension scheme. If you are paying into a ‘net pay’ pension scheme (some workplace schemes are set up like this), then your contributions will be taken from your pre-tax salary, meaning income tax relief is usually paid automatically.

But if you’re paying in money that you’ve already paid tax on, you’ll be in a ‘relief at source’ scheme. These schemes include private and personal pensions like SIPPs. In these schemes, basic rate tax relief (20%) is automatically added onto what you pay in personally, but you’ll need to claim any extra relief directly from the taxman.

For example, if you pay £1,000 into a SIPP, basic rate relief of £250 is automatically added to your contribution, meaning £1,250 in your pension. But a higher rate taxpayer could claim a further £250, and an additional rate taxpayer an extra £312.50. These extra amounts don’t automatically go into your pension but still reduce your tax bill and lower the cost of getting that £1,250 in your pension.

As the size of pension contributions increase, so does the incentive of claiming back any higher rate relief due, as the table below shows.

Source: AJ Bell

How to avoid missing out

Check how tax relief works in your scheme(s). If you’re paying into a ‘relief at source’ scheme and you’re a higher or additional rate taxpayer, make sure you reclaim the extra relief. You can do this by contacting HMRC or via your self-assessment tax return if you usually complete one.

Even if you only make a relatively modest pension contribution, you’ll get a cheque worth a few hundred pounds. This can run into the thousands if you make larger pension contributions or you’re able to backdate your claim for previous years.

3) Get the most out of your investments

How much you pay into your pension (and how early you start) is probably the key factor in determining what you’ll eventually get in retirement, but your choice of investments can provide a significant boost too – particularly over the longer term. If you’re starting out saving for retirement, your investment time horizon is likely to be 30 to 50 years plus, which is a long time in anyone’s book.

Your workplace pension will be picked for you by your employer. If you take no action, you will be placed into the ‘default’ investment fund. Although this benefits from a cap on charges currently set at 0.75%, it will not be designed for you personally. Different default funds have vastly different investment strategies, meaning they deliver different investment outcomes for their members.

While attitude to risk differs from person to person, generally younger investors can tolerate greater fluctuations in the value of their pension pot over the short term as they don’t need to access the money for decades. Historically, those who have been willing to accept market dips in the short term have generally been rewarded via returns over the long term.

Got a workplace pension?

At the very least you should have a look at the default fund your money is going into and make sure you are happy with the investments you own and the level of risk you are taking. You might decide that you’d rather pick your own investments from the range on offer to you.

Want to save more towards retirement?

We offer two types of personal pension accounts. All you need to do is decide how hands-on you want to be in choosing and managing your investments.

Learn more about our SIPP

Learn more about our Ready-made pension