Taking advantage of the tax benefits of a pension could be the boost you need to achieve your retirement goals. Yet it may be worth reassessing your pension to see if you can further improve on the benefits and its potential to help deliver a comfortable life later on.
It makes sense to ensure that you protect your efforts – especially if you have accumulated a meaningful pension pot over the years.
1. Use your full pension allowance – each year
Although pension annual allowances can be carried forward for up to three tax years, if you were relying on carrying forward your annual allowance from the 2015/16 tax year, you will need to do it by 5 April.
Therefore, there is up to £40,000 of pension annual allowance that could be lost if not used by this time – so tax relief of up to £20,000 could vanish. For clients drawing upon their pension and subject to the Money Purchase Annual Allowance (currently £4,000), this cannot be carried forward at all into later tax years.
Utilising these allowances each year will help maximise the value of your pension pot.
2. Be mindful of fees
Fees can be highly erosive over time. If you hold a pension worth £100,000 with Netwealth, and assuming no further contributions are made, over 10 years this could be worth £162,889 when you pay a fee of 1.0% a year. By paying a fee of just 1.0% more over the decade (2% in total), the value of your pension would only be worth £148,024.
Source: Netwealth. Assumes gross investment returns of 6% per annum
3. Ensure your pension is diversified
To be well diversified is a popular refrain and for good reason. Different assets perform better at different times: European shares could outperform all other assets in one year, US shares could outshine the next and UK government bonds the year after that. A diversified portfolio can help you to benefit from the gains and mitigate the losses from individual asset classes.
As the following chart shows, it is very difficult to predict which assets will do better or worse over a given period. The chart ranks asset classes according to which performed best each year.
Source: Netwealth, Bloomberg. Market returns in GBP, some assets reflect currency hedging.
4. Understand your risk tolerance – and how it could change
When you understand how much risk you are comfortable taking, you can see if this matches with the risk you are able to take. Younger investors may want to aim for higher growth – and therefore take more risk – knowing that in the event of a downturn there is plenty of time before they draw from their pension portfolio for asset prices to recover.
If you are approaching pension age, you may become more risk averse and prefer a portfolio with a higher percentage of fixed income (bond) assets, which are historically less volatile. Once you know what your risk tolerance is you can then choose investments that make the best use of your preference and review the potential impact of your selection using these powerful tools.
5. Capture the benefits of investing earlier in the year
The earlier in the year you can contribute more to your pension, the better. This allows your pension to benefit from the potential of a full year of growth, although there is no guarantee that the value of your investment will rise. Even if you do not have the full amount you would like to invest you can invest monthly or regularly, to also take advantage of your money spending more time in the market.
The next step to boost your pension
There are several aspects of investing – which impact your pension’s worth – that are within your control as we have examined in a previous article. To ensure your pension is as robust as it could be, these valuable steps may be worth considering sooner rather than later.
If you would like the prospect of lower fees, effective diversification and a risk level that suits your goals better, please get in touch about transferring your pension to us.
Please remember that when investing your capital is at risk.