High earners can feel hemmed in by continued tax raids to pension savings, but by thinking outside the box they can find ample tax-efficient routes maximise their retirement savings.
Your pension pot is your most important store of wealth. But while retirement saving levels are on the rise, there is still a disturbing lack of attention being paid to making that money work as hard as possible.
The UK is among the world’s leading countries when it comes to pensions savings, according to new figures from the OECD. The UK’s overall pension assets now amount to 105% of Gross Domestic Product, marking a stunning ascent from 73% in 2007 and putting other European nations like Germany and France to shame (at 6% and 7% respectively).
This is undoubtedly very good news amid rising life expectancy, seismic shifts in the job market and straitened government finances. The message has clearly sunk in that people now have to plan for potentially decades in retirement and that the state pension – with its ever-rising age thresholds – cannot be relied upon as in times past.
While the nation may be putting more money aside for retirement than ever before, many people still aren’t saving anywhere near enough. Nor are those funds being put to the best use most of the time
But while the nation may be putting more money aside for retirement than ever before, many people still aren’t saving anywhere near enough. Nor are those funds being put to the best use most of the time.
Given that a seemingly quite substantial pension pot of £260,000 may generate an income of just £9,000 a year* it is frightening that the average one amounts to less than half that at £125,000. And it is particularly so when we consider that people tend to seriously underestimate their living expenses in retirement, believing these will account for only 38% of their outgoings, against a reality of 53%**.
Even at the upper end of wealth, a woeful lack of proper planning is in evidence. The lifetime contribution allowance limit has been successively lowered to now stand at £1,055,000 and many “sleepwalk” into breaching this without exploring other tax-efficient means of saving for retirement like ISAs.
Pension freedoms have put savers more in control, but we now have a situation where two-thirds of people are shifting their pots into drawdown without working out how much they can really afford to extract***. Meanwhile, the FCA has warned that around 100,000 final salary scheme members are trading in their guaranteed income for a cash lump sum each year with scant regard as to whether this is the right choice for them or not (it is thought it isn’t in as many as half of cases).
If you suspect you could be getting better returns from your pension pot at lower cost, then it couldn’t be simpler to find alternative providers to compare your existing one against using our search tool. And, if you do discover a better deal, changing wealth manager is far easier and quicker than you might think.
In fact, it is no exaggeration to say that there is a lack of proper retirement planning all round in the UK – in how much to save, how to hold those funds and how to maximise the returns from them, both in the accumulation and (ever-longer) decumulation phases.
It is heartening that around two-thirds of our users are seeking financial planning advice, these enquiries overwhelmingly being pension focused. But where we really want to facilitate change is for people to manage their pension pots far more proactively.
The crux of the matter is that a well-funded pension pot does not necessarily mean one that is well looked-after – at all
The crux of the matter is that a well-funded pension pot does not necessarily mean one that is well looked-after – at all.
The tricky thing about managing a pension pot well is to take neither too much nor too little investment risk – an extremely difficult balance to strike on your own.
If you play too safe you risk your capital’s growth not keeping pace with inflation. On the flipside, if you dabble with higher-risk investments that go sour then you could find yourself with diminished time – and earning power – to rebuild. Given the stakes, it’s scary how many people make an experiment of managing their most important store of wealth rather than accepting professional help.
These brave DIY-ers aside, what perplexes me most, however, is diligent savers sticking with lacklustre investment management when there is so much better out there. There many fantastic wealth managers available that will really maximise your returns and minimise your risks at a very reasonable cost. Yet so many people tolerate low returns, high fees and poor service simply because they let apathy take hold – even though this is the money that will keep them from what could be a very uncomfortable old age.
The magic of compounding means that increasing your investment returns and/or trimming management fees even by quite a modest amount could make all the difference to your lifestyle in retirement. This is why all investors should review their wealth manager every three to five years to ensure they are getting the best possible deal. Through findaWEALTHMANAGER, this takes no time at all, doesn’t cost you a thing and could transform your standard of living and ability to help family in your golden years.
The magic of compounding means that increasing your investment returns and/or trimming management fees even by quite a modest amount could make all the difference to your lifestyle in retirement
In short, well done if you have a well-funded pension pot, but don’t stop there. Make sure your retirement savings are always working as hard as they possibly can for you. It is never to early – or too late – to take action, so why not take a few minutes to see which best-matched wealth managers are ready to help you?
Don’t settle for less than the retirement you deserve.
* Royal London, 2018
** Schroders, 2018
*** Zurich 2019