Thanks to financial literacy and the power of the internet, most people especially workers are increasingly learning about the importance of setting aside money in a retirement account. Having said that, there is still a discrepancy between what typical workers should save and what they are saving.
Financial experts propose that saving for retirement should begin early and be consistent. For instance, a person who begins saving at 30 and beyond, loses out on hundreds of thousands worth of savings they could have made thanks to the power of compounding.
Most people cite financial commitments including skyrocketing bills as some of the reasons why they are not saving enough for their pension. If you are struggling to find enough money to tuck away in your retirement account, here are 6 easy ways you can boost your pension contribution.
Redirect Your Pay Rise to Savings
As you begin saving for your pension, put aside whatever you can afford for a start. Thereafter, redirect portions of your pay rise to savings. For instance, you could hive off 35 to 40% of your pay rise into pension savings.
The logic behind using a pay rise to fund your pension is that this is money you didn’t have when starting your savings journey and therefore it wasn’t factored into your expenses. Instead of exposing the whole rise to your expenditures, you can pay in part of it to your retirement account.
Pay the Extra Money When a Regular Spend Ends
Regular expenditures such as paying off car loans or mortgages have a time limit. Some of them last 3 to 5 years while others may last a little longer. Whenever a regular expenditure such as repayment for long-term loans no guarantor comes to an end, the extra money that now flows into your bank account should be directed to your pension.
The secret with such small increases in pension contributions is that they gradually add up making a huge difference in the years that follow.
Leverage Employer Contributions
In the UK, The Pension’s Regulator requires that employers submit the correct contributions to their staff pension schemes. Every scheme has its rules including the automatic enrolment scheme where employers are required to contribute at least a minimum into their staff’s pensions. For instance, beginning the 6th April 2019, employers are required to contribute at least 3% with the staff contributing 5% making a total of 8%.
Some employers are generous enough to match their employees’ contributions should the latter decide to increase their contributions subject to a certain limit. If you pay a percent or two above what you normally contribute, your employer may match that boosting your pension contributions.
The easiest way to go about this is to ask your employer whether they contribute to your pension plan or not and if yes, by how much. This will give you the exact figures to enable you to push your contributions to enjoy the maximum possible matching benefit.
Pay in a Lump sum
If you receive a windfall or payments such as bonuses, the best idea is to pay the lump sum into your pension. Most people have the idea of pension contributions being small regular amounts, but you can give it a boost with a lumpsum deposit.
The government on its part will top it up with a relief befitting your pension contribution. Tax reliefs on pension contributions are normally subject to a certain limit but they can give you real savings.
For instance, if you are a basic taxpayer and contribute £1,000 into your pension plan, the HMRC will give you a tax relief of £250. In case you are a higher rate taxpayer, you could claim back more. Familiarize yourself with your tax circumstances as this may give you some significant savings.
Don’t Touch Your Pension
If you want your pension to grow, put off the temptation of breaking into your retirement pot. The longer you leave it in there, the bigger the difference it will make. However, it is important to have it in your mind that your pension growth depends on the investments your fund manager has made.
Just like any other investment, there is no absolute guarantee that the investments will not fall in value. There is however a chance for your pension fund to grow if you don’t make any withdrawals at least in the short term. If you are in urgent need of cash, you can apply for loans for pensioners instead of drawing on you retirement fund.
Choose Your Investments Wisely
Behind every pension fund are investment managers who make the tough choices of where to invest to maximize returns to their contributors. As you choose a pension fund, you should also pay attention to where they invest your contributions.
Some pension schemes invest your money automatically the moment you join the scheme. This may not be a good idea for you as you don’t have any influence on where the funds are invested.
Choose a fund that not only invests in assets with a decent return but also a scheme that gives you the flexibility of allocating or determining where your funds are invested. If the fund you are in doesn’t live up to your investment ideals, you can switch to another fund at will. Most online pension schemes allow you to make changes to your pension at the touch of a button. If you are not sure of the details of your scheme and whether you can switch or not, speak to your employer or look at policy information.
Your pension contributions will determine the kind of life you will live post-retirement or in your old age. If you put in large contributions, you will have enough in your pot to sustain your lifestyle.
While financial resources are always constrained, using the above tips can help give your pension a boost. If you are employed, maximizing your employer contributions can give you easy money. If you get a lump sum, you can always lump it in either a portion of the whole of it. Remember to check the investments your contributions are put into as this will determine how fast it will grow.