3 useful pension planning tips to benefit your retirement now

The cost of living crisis has dominated headlines for the past year. It has affected many households across the UK, as the cost of essentials such as groceries and key utilities have continued to climb. 

It has also sparked a great deal of concern among soon-to-be retirees. According to Unbiased, 75% of Brits fear the cost of living crisis will affect their retirement plans. 

Last month we wrote about how 2 in 3 Brits aren’t confident about their retirement plans and a few simple steps you could take to solidify your own. 

This month, we’ve expanded on the topic and outlined some pension planning tips that we feel you should be aware of this year.

Here are three areas you should consider.

1. Unlocking the full value of the State Pension

Last month, we covered some of the basics of the State Pension. If you’re able to receive the full new State Pension, it could provide your retirement income with a valuable boost.

To be eligible for the full State Pension, you typically need to have accumulated at least 35 “qualifying years” of National Insurance contributions (NICs).

However, if you have any gaps in your record, there are ways to make catch-up contributions, so that you remain on track to receive the full State Pension upon retirement. 

You can check your National Insurance record through the government’s website and fill in any gaps by paying voluntary NICs. These can typically be made for a period of up to six previous tax years.

The government has extended the window for individuals who worked prior to 2016 and have National Insurance records prior to the rollout of the new State Pension. If you worked between 2006 and 2016, you could additionally purchase NICs for that 10-year period.

The window to make these contributions has recently been extended to 5 April 2025. 

Paying voluntary contributions isn’t guaranteed to increase your State Pension so be sure to check with us before you decide.

2. Maximising your workplace pension contributions

Your workplace pension can be an incredibly tax-efficient way to save for your eventual retirement. Even more so in recent times, due to auto-enrolment.

While pension tax relief is available on both workplace and private pensions, your workplace pension scheme is likely to also benefit from the “free money” of employer contributions. 

As part of auto-enrolment, employers are required to contribute at least 3% of their employee’s monthly income to their respective workplace pension scheme. If you opt to increase your pension contributions, while it isn’t a requirement, your employers may opt to follow suit.

Pension contributions could also help you navigate a potential problem affecting many higher-rate taxpayers.

If you earn between £100,000 and £125,140 each year, you might end up paying an effective tax rate of 60%. This 60% “tax trap” is a result of a combination of the frozen Income Tax thresholds and the tapering of the Personal Allowance for high earners.

Read more: 2 million Brits face paying an effective tax rate of 60% – here’s how your pension contributions could help protect your income

One of the ways you can avoid falling foul of the 60% tax is to increase your pension contributions through salary sacrifice, effectively lowering your income on paper, while also taking advantage of the tax relief associated with pension contributions.

It is important to note that effectively lowering your salary could affect affordability calculations when you apply for finance (such as a mortgage) and your borrowing potential may be lower. You might also find that your entitlement to workplace benefits like death in service, or maternity/paternity pay could be lower.

3. Might an annuity be beneficial as rates continue to soar

One way you could utilise your pension to provide for your retirement income is by using your pot to purchase an annuity. 

This has become an increasingly attractive option this year with MoneyWeek reporting that rates in the UK have hit their highest levels since 2007/08 – rising 44% across 2022.

An annuity is an especially secure and stable way to gain a guaranteed income for life. However, they can be restrictive and could be counted as taxable income.

Your purchased annuity income will likely be determined by several factors, such as the:

• Size of your accumulated fund
• Annuity basis you choose
• Provider’s annuity rates at the time of purchase.

Once you’ve purchased an annuity, it is unlikely you’ll be able to reverse your decision at a later date. So, it’s vital that you consider all the pros and cons before opting to purchase one.

Read more: 8 revealing pros and cons to consider before purchasing an annuity

Reach out to get advice on the next steps for your retirement plans

Your pension is likely to be a vital part of your retirement plans. It is important that you don’t rush into any decisions. 

Receiving expert advice could greatly benefit your overall retirement plans. A good first step could be to set up a meeting byemailing us at info@lloydosullivan.co.uk or by calling 020 8941 9779.

Please note: 

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.