By Steven Cameron
After Scotland being battered by high winds over the last weeks, it would be nice to welcome some calmer conditions. But unfortunately, when it comes to our finances, the forecast for the year ahead looks decidedly unsettled.
Inflation is at its highest for 30 years and
rising and, despite a buoyant jobs market, wage increases are lagging behind. Take-home pay will be further hit from April as National Insurance contributions increase while the freezing of most income tax thresholds will also mean many see that bit more being deducted in tax. To cap it
all off, interest rates are set to continue to rise, which is bad news for borrowers.
One group disproportionately affected right now are pensioners on fixed incomes, and not just because of rocketing fuel bills. Despite inflation currently running at 5.5 per cent (CPI) and expected to peak at 7.5% this summer, their state pension is going up by 3.1% this April, in line with price inflation back in September. This should be a warning to all of us – relying on the state pension alone will not see you sail comfortably through choppy waters.
It is why, despite these tough times, letting your savings for the future be blown off course should be avoided if possible. With less “spare cash” to go around, it’s more important than ever to make sure your money and investments are working hard for you. Just like weekly budgeting, making smart, timely decisions for retirement can make a big difference.
In today’s world of defined contribution pensions, people more than ever have to take responsibility for their financial futures. Wherever you are in your retirement journey, there are tips that can support you along the way.
Make sure you’re making the most of any workplace pension you have been automatically enrolled into.
You will be receiving a valuable employer contribution paid in on top of your own contribution. This, plus Government tax relief, means you can often double your money overnight. But opting out of your workplace pension usually means you will lose your employer contributions too.
If you can afford to pay in any extra, check to see if your employer will match you £ for £.
If you are well away from retirement and are prepared to take some investment risk, have a look at your fund options. While nothing is guaranteed, an extra 1% return over 30 years could boost your ultimate pot by 19%
Check to see if you can sign up online to your pension, which will then help you keep track of how you are doing.
If you have changed jobs a few times, you could look into consolidating all your past pensions, bringing them together so you can keep track, have a clear picture of how much you have saved, and potentially end up paying less in charges.
Now might also be a good time to review your wider savings, including the likes of ISAs. Holding a certain amount in cash can be good for a rainy day fund or short-term needs, but if you feel you have more saved in cash than you expect to need for the next five years or so, consider investing some of it into a stocks and shares ISA – this might allow you to keep pace with inflation and avoid losing purchasing power. But remember, you could get back less than you originally invested.
Think carefully about when you plan to
retire – while retiring early may have surface appeal, deferring for a couple of years could
give you more money to spread over fewer years in retirement.
When you do start drawing a pension income, you will be asked to choose how to turn your fund into an income. You can take 25% as a tax-free lump sum with the balance taxed as income at your marginal rate.
The options include: buying an annuity to have a regular guaranteed income for life; keeping it invested and drawing down an income as and when you need it; taking a lump sum (although watch out for tax deductions if you take more than 25% as cash); or a combination of these.
You can get free guidance on this from Money Helper, a Government sponsored service.
For a more detailed and personalised recommendation, you can pay for financial advice.
Whatever the stage of your pensions hopes,
it is always good to have a plan. Start with working out how much you want as a target retirement income. Check how much you might get from your state pension and add on what your private pensions are projected to provide
– you can get this from annual statements or online.
Most people will find there is a gap to fill and, despite the current cost of living squeeze, the sooner you are able to pay in a little more, the more likely it is you can get on track.
If you are not an employee, and instead are self-employed, unfortunately you don’t benefit from auto-enrolment. While you still qualify for tax relief, there is no employer contribution to help you on your way.
On top of all the choices and challenges covered above, you also have an initial choice
to make in selecting your own personal pension. If you’re not comfortable doing this, you can always seek advice.
Scots are pretty hardy when it comes to the weather. We all need to live up to our reputation for prudence when it comes to our finances.
Steven Cameron is pensions director at Aegon.
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