Little-known way to boost your pension by up to £67k when taking a career break to raise kids
A LITTLE-KNOWN trick could boost your state pension by £67,000 in retirement.
Preparing for when you retire is vital the closer you get to pension age, there are often nifty ways you can add to your pot.
Pension expert at Hargreaves Lansdown Helen Morrisey explained that one way is to have your partner contribute to your pension when you take time off work – like to raise kids.
This way you’re not missing out if you take a career break, and your retirement pot doesn’t have to suffer.
Plus splitting income across partners is important to make the best use of tax-free personal allowances.
A partner can contribute up to £2,880 per year to the pension of a non-working partner – this will be boosted to £3,600 by the government through tax relief.
Helen said: “Partner pension contributions are a real hidden hero that can give your pension a massive boost.
“Having someone contribute to your pension or SIPP during times you aren’t working can plug gaps in your pension that would overwise become a yawning chasm.”
The finance experts compared two potential scenarios where someone contributed to a pension between the ages of 22-68 on a starting salary of £28,000.
Of course, the scenario sees the saver contributing the workplace pension auto-enrolment minimums – 8% in total, with them contributing 5% and their employer paying at least 3%.
In the first example, the saver takes a five-year break between the ages of 32 and 37 – missing out on those years of contributions.
In the other example, the member’s partner plugs the gap during that period by contributing the full £2,880 per year – rounded up to £3,600 by pension tax relief – during those five years.
Helen explained: “It makes an enormous difference with the person receiving partner contributions ending up with a pension pot of more than £398,000 by age 68.
“The person who didn’t ends up with more like £331,000 a massive £67,000 difference.”
Do bear in mind though, these figures don’t take into account inflation so their purchasing power will be lower than they would be today.
They also are based on assumed growth of 5% per year and fees of 1%.
This nifty trick will also improve tax-free income at retirement.
A couple can receive up to £25,140 pension between them before paying income tax, Helen pointed out.
Plus, you don’t have to contribute loads – even relatively small contributions can make a huge difference.
Helen said: “The time those extra contributions spend invested in the market keeps up the momentum of building your pension over the long term.
“It can not only significantly strengthen your own retirement resilience but that of your family overall as well.
“It’s a strategy well worth considering if there is the extra money in the family budget to allow for it.”
To actually make the move, the couple would be able to call their pension provider or make the contributions online.
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension – This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year upon retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you’ll need 35 years of National Insurance contributions to get this. You also need at least ten years’ worth to qualify for anything at all.
- Basic state pension – If you reach the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £156.20 per week and you’ll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
What is auto-enrolment?
Auto-enrolment is when you’re automatically placed into your workplace pension scheme, with your contribution deducted from your pay packet.
Bosses have had to automatically enrol staff into pension schemes since October 2012 to get workers saving for their golden years.
The only exception is if you’re under the age of 22 or earn under £10,000, in which case you have to ask to opt in.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
Crucially, the contribution you make as an employee is deducted before tax – so the actual amount you’re putting away is less than it sounds.
For example, if you pay 20% tax on your earnings, and your pension contribution is £100, this only really costs you £80 as this is how much that amount would have been worth after tax.
While opting out of a workplace pension would increase your monthly salary, it’s best to only do this as a last resort, as you’ll have less in later life.
Meanwhile, here’s the little-known bank account that could help you retire early.
Plus, savers could be missing out on hundreds of thousands by not making a key move ahead of retirement.
Top tips to boost your pension pot
DON'T know where to start? Here are some tips from financial provider Aviva on how to get going.
- Understand where you start: Before you consider your plans for tomorrow, you’ll need to understand where you stand today. Look into your current pension savings and research when you’ll be eligible for the state pension, and how much support you’ll receive.
- Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too.
- Take advantage of online planning tools: Financial providers Aviva and Royal London have tools that give you an idea of what your retirement income will be based on how much you’re saving.
- Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement.
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