SAVING enough money for your pension is crucial if you want a generous nest egg upon retirement.
The Bank of England has predicted that UK economy will officially enter recession by the end of the month – but reviewing your finances now could save you cash in the long run.
Romi Savova is founder of PensionBee and one of our Squeeze Team experts
With inflation set to hit double figures again as the cost of living continues to rise – making small savings now could still be rewarding in the long-term.
Sterling hit $1.03 against the dollar on Monday, the lowest level since decimalisation in 1971.
The fall in the pound and rising inflation will subsequently lead to a squeeze on your pensions – and your pot may not go as far it used to.
Inflation fell to 9.9% in August after reaching a 40-year high of 10.1% earlier in July.
But, the Bank of England now expects inflation to peak at 11 per cent this October as the country falls into recession.
A country is in recession when its economy shrinks over a sustained period of time, rather than growing normally.
In a recession, the number of people in debt and arrears is likely to saw, and there could be more defaults on loans and mortgages or repossessions and bankruptcies.
Our Squeeze Team expert Romi Savova, founder of PensionBee, has shared her top four tips to protect your pension as the country heads towards recession.
Whether you’re worried about paying your bills, need to clear debts or don’t know what to do with your pension, get in touch by emailing [email protected].
Merge your pension pots
Hunt down and consolidate any old pension pots, where it makes sense to do so, in order to avoid losing track of hard-earned savings.
According to the Department for Work and Pensions, the average person will have 11 jobs in their lifetime so keeping track of various workplace pensions may become difficult over time.
Romi said: “Consolidation can provide greater visibility over one’s pension savings, making planning for the future easier.
“It also means a saver will only pay one set of fees, rather than multiple fees for various pots, which can erode a pension’s value over time.”
Savers can track down previous pension pots by contacting former employers, pension providers, or using the government’s free Pension Tracing Service.
Beware of fees and do your research before moving your cash.
Set saving goals
Set short-term saving goals. Saving for retirement should be viewed as a marathon, not a sprint.
Romi said: “Taking the time to put in place an achievable short-term saving plan can help keep savers on track with their savings journey even in times of significant financial stress.”
This can then be balanced with periods of higher contributions when a saver has more disposable income available.
Romi previously told HOAR that saving £3 a day from the age of 20 could give you a pension pot worth £330,000 by the time you retire.
That’s around the cost of a daily coffee, so if you’ve got an expensive caffeine habit, smoke, or regularly buy takeaway lunches, consider cutting back for the sake of your future self.
Keep your cash invested
Keep pension savings invested for as long as possible, only withdrawing when absolutely necessary, to give a pension as much time to grow.
Romi said: “While everyone can legally access their personal and workplace pensions from age 55 (57 from 2028), it doesn’t mean they always should, particularly in periods of high inflation.”
Before making any withdrawals, a saver should carefully consider if they have any other sources of income besides their pension, and how long they anticipate it to last.
Anybody over the age of 55 can start drawing money from their pensions pot.
But it is important to remember the earlier your take your cash, the longer you will need it to last.
Stick to this rule if you must withdraw
Consider a cautious withdrawal approach when accessing any pension savings.
Romi said: “A widely recommended pension withdrawal strategy is the 4% rule, where a saver can withdraw 4% of their total savings each year without adversely impacting their overall pot size.”
Setting a percentage figure for their withdrawals automatically reduces in size when markets are lower, helping to avoid cashing out too much of their pension too soon.
In April 2015, the tax rules were changed to give people greater access to their pensions.
Drawdown of pension income is taxed at marginal income tax rates rather than the previous rate of 55% for full withdrawals.
But the tax-free lump sum continues to be available.
The government offers free and impartial guidance via the phone or face-to-face, Pension Wise, to help retirees make the choices that reflect their needs in retirement.
