Recently published research has painted a worrying picture about the state of new retirees’ finances in the UK. According to a recent study more than three-quarters (77%) of maturing pensions were worth less than £50,000, while 43% didn’t even reach £10,000. And only 5% were worth more than £250,000.

These figures suggest that lots of people haven’t saved enough for retirement. Of course, many people will have more than one pension, but the number of pots worth less than £10,000 suggests many of them are likely to be small.

To put those numbers into perspective the Pensions and Lifetime Savings Association (PLSA) says a single person needs a minimum income of £14,400 a year, or £22,400 for a couple, to cover the essentials. For a more moderate standard of living – with an overseas holiday and few more meals out – that goes up to £31,300 for singles, or £43,100 for couples.

Of course, pensioners will likely have the state pension too, which is worth £11,502 a year at the full rate; nonetheless it suggests lots of retirees could end up struggling to achieve the lifestyle they had planned.

However, for those who still have a number of years before they hang up their boots, the figures could provide something of a wake-up call.

Whether you have time on your side or it’s running out fast, there’s plenty you can do to improve your future income.

1) Start as soon as you feasibly can

The younger you are when you start saving for retirement the better. The sooner you get going the more time you’ll have to let compounding (reinvesting your profits to make more money) work its magic and the less you’ll actually need to save to reach your goal.

Let’s take the following – albeit simplified – example.

Bruce starts saving £200 a month into a pension in his first job at age 22. By the time he retires age 66, he’ll have saved £105,600 in total but have a pot worth £384,822, which means he’s gained £279,222 (assumes a 5% return net of charges).

Brian, however, has other priorities when he starts work and opts out of pension saving until he reaches the age of 40. He knows he’s on the back foot, so pays in £400 a month.

However, by the time he reaches age 66, he’s paid in a total of £124,800 but only has £256,366 to show for it, with a less impressive gain of £131,566.

So, Bruce pays less into his pension than Brian but still ends up with a much bigger pot.

2) Don’t forget just how valuable tax relief is

Any suggestion to start saving early will be cold comfort to those who are feeling they need to make up for lost time. But it is never too late to boost your pension. While it takes years to really get the benefit of compounding on your investments, the hit of pension tax relief is instant.

Tax relief is often misunderstood, but its impact shouldn’t be overlooked. It effectively means that the government incentivises you to save for your future by refunding the tax you would have paid on that money.

As such, paying £1,000 into your pension will cost a basic-rate taxpayer £800, a higher-rate taxpayer £600 and an additional rate taxpayer £550.

The more you pay into your pension, the more you will get from the government.

It’s important, however, to get the full amount you are entitled to – and if you pay the higher or additional rate of tax there may be an additional amount of legwork involved.

That’s because if you are paying into a pension you arranged yourself, such as a self-invested personal pension (SIPP), you’ll only get the basic rate of tax relief (20%) applied automatically. To get the remaining amount you’re entitled to, you’ll need to complete a tax return.

This is referred to as applying ‘relief at source’. Some workplace schemes will also work in this way, with your pension contributions being paid after tax has been deducted. However, others will pay your contributions from your pre-tax income, so you get the full rate of tax relief straight away and higher and additional rate taxpayers won’t need to take any further action. This is called a ‘net pay’ arrangement.

If you aren’t sure whether your workplace scheme is a relief at source or net pay arrangement, check with HR.

For those who do need to claim tax relief back through their tax return, you will be able to use the outstanding relief to reduce your overall income tax bill, or you could claim a rebate and pay that money into your pension.

3) Consolidate your pensions

If you’ve built up a collection of old workplace pensions that you’re no longer paying into, there may be an argument for consolidating them into a new pension such as a SIPP.

Keeping everything in one place will make it much easier to keep track of your retirement savings, but it could also reduce your costs as many online SIPPs will charge lower fees. While seemingly low percentage charges might look small, once applied to a pension they can run into the thousands of pounds and take a sizeable chunk out of your returns over the years.

It should be relatively straightforward transferring defined contribution pensions. You just need to be mindful of any exit charges that might apply and find out whether transferring will mean you lose out on any other benefits, such as guaranteed annuity rates or a lower retirement age.

4) Review your investments

It’s also a good idea to review where your money is invested and to consider the amount of risk you’re taking – if you’re being unnecessarily cautious you’ll be limiting your pension’s ability to grow, especially if you still have plenty of time before you retire.

Where your money is invested could have the biggest impact on how long it will last in retirement. Nobody is suggesting a high-risk approach – it’s about finding a sensible middle ground. So, it’s important to regularly review your investments to make sure they remain on track and remain aligned with your plans and attitude to risk.

For example, your pension savings may be invested in fairly high-risk funds that have the potential to grow significantly in value, but also are more likely to experience larger losses, particularly during periods of market volatility. Moving to lower-risk investments means that you’re less likely to see big ups and downs in the value of your pension savings.

If you’re relying on your pension savings to provide you with a comfortable income for the rest of your life, you also need to make sure that your investments will provide enough growth potential. This has been particularly important in recent years where your money has faced the challenge of high inflation rates as well as potentially having to last for many years.

It also makes sense to check how much you’re paying, not just for your pension platform, but also for the funds you’re investing in.

Professional advice could provide some welcome reassurance if you don’t feel confident choosing and reviewing your own investments so that you get the right balance between growth and smoother returns.

5) Pay in lump sums

From time to time you may get the benefit of a windfall – whether it’s a bonus from work or an inheritance. Paying these into your pension means your investment will also be boosted by tax relief, giving you more ‘bang for your buck’ than you would get if you spent it or paid it into another account.

Each year you can pay 100% of your income, up to a maximum of £60,000, into your pension and still benefit from tax relief on your contributions. However, if you have any unused allowance from the three previous tax years, you may be able to pay in more by taking advantage of carry forward rules. The catch is that you still need to have earned the amount you want to pay in, during the current year.

Self-employed people, with a fluctuating income, can also benefit from paying lump sums into their pension to make up for a lack of contributions during leaner periods. Completing your tax return can provide a helpful prompt – as making a contribution won’t just shore up your retirement finances, it will also reduce your tax bill.

There’s support if you need it

If you have specific questions about funding your retirement lifestyle, or if you’re feeling anxious about spending money in retirement, speaking to a financial adviser could help you understand your options.

If you’re already an abrdn client, get in touch with your financial planner. If you don’t have an adviser, you can find out more about how our financial planning services can help you.

This content is based on an article by Rachel Lacey for ii.

The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Information is based on abrdn’s understanding in October 2024.

abrdn Financial Planning and Advice Ltd is registered in England (01447544) at 280 Bishopsgate, London EC2M 4AG and authorised and regulated by the Financial Conduct Authority.