Six ways to turbocharge your pension with a new-year makeover

Rachel Lacey reveals six simple ways to revitalise your pension with a new-year makeover.

If you want to get 2023 off to the best start, but haven’t quite got the energy to go to the gym, or even get off the sofa, there’s plenty of financial admin you can tackle, and there’s no better starting point than your pension.

A pension review might not give you the instant financial hit you might get from switching broadband or shopping around for your car insurance, but small changes made now could make a huge difference to your lifestyle in retirement.

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It’s impossible to quantify the difference it could make for you – but it’s not beyond reason to think that a few changes here and there could pay for extra holidays, meals out and time with family and friends. It might even let you retire a little earlier than you’d planned.

Give your pension a makeover with these easy steps:

1) Check the value of every pension you have

The easy way to do this is to gather together all your pension statements – you should receive one each year. If you can’t find any, you can either log on to any online accounts if you have them, or call your provider and ask for a valuation. Tot up the total value of all your pensions.

2) Track down lost pensions

You also need to make sure you haven’t got any pensions that have gone AWOL, maybe from your first job, or one you stayed in for only a year or so?

Frequent job changes mean lots of us end up with multiple workplace pensions. Unless you’re all over your admin and update providers with every change of address, it’s all too easy to lose track of them. Thankfully, so long as you can remember a few basic details, it shouldn’t be too tricky to track down any missing schemes with the government’s free pensions tracing service.

3) Think about boosting your contributions, but don’t sweat it if you can’t

Most of us could do with paying more than we do into our pensions. If you can afford to do so, it’s an easy and obvious place to start. Look at your budget and if you can squeeze another £50 or £100 into your pension. It will be worth it (unless you’re in danger of breaching the lifetime allowance, that is).

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But, with extra cash not easy to come by at the moment, it doesn’t matter if you can’t afford to up your pension contributions. There’s still a lot you can do to boost your pension without paying any more into it.

4) Look at how your pension savings are invested

There are two ways reviewing your pension investments can boost your pot’s value. You can either consider switching into better-performing funds or you can seek out  similar funds with lower charges.

A good starting point is to look at the performance of your funds, comparing returns against equivalent funds, as well as the index they are linked to.

If their performance is lagging, consider a switch. This can be particularly beneficial if you’re currently paying a premium for an actively managed fund.

Charges on actively managed funds can be as much as 1.5%, sometimes more. But passive funds – which simply replicate the holdings of their designated index – charge much less and you can pay as little as 0.1%. On a £200,000 pension, that simple switch could save you £2,800 in management fees in your first year alone. Over time, the switch from active to passive management could boost your pension by tens of thousands of pounds.

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Of course, if you’re in the right actively managed funds, and you’re beating the index, there’s no reason to switch now. But it’s a good idea to keep a watchful eye.

If you’re reviewing workplace pensions, you may well be in so-called default funds. This is where your contributions are invested if you don’t make an active decision as to where your money should go. They’ll likely be life-styled, which means they will become lower risk as you get closer to retirement.

In some cases default funds can be quite cautious in their approach – this is because one size needs to fit all. You may be able to switch if you’re worried you’re not getting the growth you need.

5) Think about consolidating your pensions

If the choice of investments is important to you, or you don’t want the hassle of managing lots of pensions, it might be worth consolidating your old pensions into a self-invested personal pension (SIPP).

You’ll get access to a much bigger range of investments (including funds, investment trusts, exchange-traded funds and shares) and, if you’re moving out of a traditional pension from a life insurance company, you could save a fortune in charges too.

Life office pensions will typically charge in the region of 0.75% to 1% of your savings each year. That might not sound much but on a hefty investment like a pension it mounts up.

Charges on newer, modern pensions, which are run on online platforms, will normally be noticeably lower.

According to research from analysts, The Lang Cat, by transferring a £150,000 older-style pension into one that charges a low, flat fee, it would be possible to save £20,000 over a 20-year period.

It’s important to note that pension consolidation doesn’t work for everyone. You need to check that you won’t lose any valuable benefits for example, such as guaranteed annuity rates, or face high exit penalties. It doesn’t normally make sense for people in defined benefit schemes to transfer because they pay a guaranteed income in retirement.

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You also shouldn’t transfer a workplace scheme that you are currently paying into. This is because you would miss out on your employer contributions.

6) Make sure you are getting the right amount of tax relief

When you pay into a pension you should get tax relief that is equivalent to your marginal rate of income tax. This effectively means that you get the tax you would have paid on that income back and it can give your pension contributions a valuable boost.

In black and white that means it costs basic-rate taxpayers £80 to invest £100, higher-rate taxpayers only need to pay £60, and additional rate taxpayers just £55.

Some workplace pensions (known as net pay schemes) will make deductions from your salary before tax meaning the right level of relief is applied automatically.

However, some workplace schemes (known as relief at source) take payments from taxed income. If you pay into a personal pension yourself, those contributions will have come from taxed income too.

In these cases only basic-rate tax relief will be applied automatically (through a rebate from HMRC).

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This means that if you pay higher or additional rate tax you’ll need to claim the extra tax relief you are entitled to yourself, through your self-assessment tax return.

If you’ve been missing out on a higher rate of tax relief for a while, you’ll be relieved to hear you can make backdated claims for the last four years.