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Thursday, 23 October 2014

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Maximise your pension pot

Recent economic events have shaken many people’s belief in the state’s ability to provide benefits.

Many now want more control of their own destiny. It has probably never been more important to squeeze every last drop of income out of your pensions and savings to boost your retirement income.

Today, I aim to give some helpful but simple tips that could help to increase your retirement income.

Firstly, make sure you track down any “lost” pensions. A lost pension is not as bizarre as it may sound. People approaching retirement will probably have a working life of around 40 years to look back on. They may have worked for several employers over this time and may have moved home a few times. Therefore it’s possible to have lost touch with previous employers, or not to have told a pension provider of a change of address, meaning that they may have lost touch with you.

It could prove beneficial to track down any lost pension arrangements sooner rather than later. The Pension Tracing Service is a free government service that can be of help.

They can be contacted at www.thepensionservice.gov.uk or call 0845 600 2537.

Another good idea is to get a state pension forecast, which will tell you how much state pension you’re entitled to when you reach state retirement age. This will include an estimate of your basic state pension and any additional state pension, also called the state second pension, formerly known as state earnings related scheme (SERPS). This is worth doing, as state benefits are extremely complicated to work out yourself. You can request this by going online at the above web address or calling 0845 300 0168.

You are usually able to increase your state pension by deferring it. You have to be of state pension age to do this, of course.

The deal is a pretty good one if you can afford not to take your state pension for a while: for each year you defer you get about 10.4 per cent extra income. So if your state pension is a £100 per week and you defer for a year, you can then expect £110.40 a week when you do start to receive it (plus inflation-based increases).

It’s also possible to take a taxable lump sum instead of the extra income – something which appeals to those who prefer a bird in the hand – but because the lump sum paid consists of the income you have given up plus interest at a rate two per cent above the Bank of England base rate, this arrangement is currently less attractive.

The problem is that with base rate at 0.5 per cent this is not a particularly appetising return, but it may perhaps be more beneficial than drawing the pension and letting it accumulate in a current account if it is not being spent.

By the time people reach retirement age they can often have accumulated a wide array of pensions and investments, frequently spread far and wide. This can present problems in keeping track of things such as investment performance and what income the portfolio is likely to provide.

It can often (but not always) be beneficial to transfer separate pensions into one consolidated arrangement.

You will then know their aggregate up-to-date value and have a reasonable idea of how much income they produce – vital considerations as you approach retirement.

When undertaking this exercise, it’s also a good time to review the underlying investment funds held within one’s pension arrangements, to be sure they’re the right ones for you moving forward.

Speak with an independent financial adviser to review yours.

For further information or independent financial planning advice email moneymatters@armstrongwatson.co.uk or call freephone 0800 195 2161.

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