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In recent years, many young people have found it difficult to balance saving with the rising cost of living. That can mean it’s sometimes difficult to put money aside for the long term.
Your pension is one of the most important financial commitments you make in life and will have a significant impact on your lifestyle in retirement. That’s why it’s so important to contribute as much as you need to achieve your life goals.
If you want to increase the amount you save into your pension, but aren’t sure how to do so, read on for four effective ways to boost your pension contributions.
1. View your contributions as an investment
It might sound unusual, but one of the easiest ways to boost your contributions is to change the way that you think about them.
According to research published by Money Marketing, thinking about your pensions as an “investment” rather than “savings” could help you boost your pension pot by more than a third. This simple change of words resulted in a 34% increase in the amount that survey participants said they would be willing to put aside for the future.
This is an aspect of behavioural psychology called “nudge theory” which centres around using positive reinforcement to improve people’s behaviour. The more positive and active connotations of the word “invest” encourage people to contribute more into their pensions than they may have otherwise.
While this is only a small step, thinking about your pension as an investment for a comfortable lifestyle in retirement, rather than as a simple savings pot, might make a big difference in how much you’re willing to put away each month.
2. Pay your future self first
Paying your future self first is a simple budgeting strategy that involves putting some money aside for savings and investments before you start working out your monthly household budget.
Instead of waiting until the end of the month and saving what you have left, you can set up payments to your savings and pension on your pay day and then spend the remaining amount. This can help you to save a good amount without leaving yourself short of money in the present.
Furthermore, you should also regularly review the amount you put aside for the future to see if you can increase your contributions. For example, when a regular expense ends, such as a car loan or a child’s education fees, this is a great opportunity to redirect those payments into your pension.
You could also put aside any additional money if you receive a pay rise, workplace bonus, or any unexpected windfall. By paying yourself first from this new income means you won’t have the chance to miss it.
This can be a great way to boost your pension contributions without making any big financial changes to your lifestyle.
It’s important to remember that even small increases to your contributions will all add up and can make a big difference over the long term!
3. Maximise your workplace contributions
Unless you’ve opted out, the minimum contribution to your workplace pension is 8%. Typically, you only pay 5% of this amount which is then topped up by an additional 3% from your employer.
Increasing your pension contributions by even one or two percent can be a great way to save more into your pension without making a big dent in your income. Furthermore, since it’s taken out before you have a chance to see it, you won’t miss it.
Some employers also offer to increase their contributions in line with yours, up to a point. This means you can potentially double the benefit from increasing your workplace contributions, which can make a significant difference to the size of your pension in the long term.
Bear in mind, however, that not all employers will increase their pension contribution in line with yours so you may want to check before you do so.
4. Make the most of tax relief
Each tax year you can receive tax relief on your pension contributions up to the Annual Allowance. In the 2020/21 tax year, this limit is £40,000 (or 100% of your pensionable earnings) into your pension across all schemes.
This tax relief can be invaluable for boosting your pension, which is why it’s important to make the most of it.
You can claim tax relief on your pension contributions according to your rate of tax. This is:
- 20% if you’re a basic-rate taxpayer
- 40% if you’re a higher-rate taxpayer
- 45% if you’re an additional-rate taxpayer.
For example, if you’re a basic-rate taxpayer and you contribute £100 from your salary to your pension, it would only cost you £80. This is because the government adds an extra £20, which is the amount that would have been taken in tax from your salary.
Over time, you may find that the tax relief on your contributions can add up to a considerable amount, which is why it’s important to make the most of it to grow your pension.
Navigating the tax implications surrounding pensions can sometimes be difficult, as there are many potential bonuses and pitfalls to consider. That’s why if you want to boost your pension effectively, you should consider speaking to a financial adviser.
Get in touch
If you want to grow your pension in a more effective way, we can help. Email us at office@verve-financial.com or call 0330 320 5048.
Please note:
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
Past performance is not a reliable indicator of future performance.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
