6 Secrets To Building A Big Enough Pension Fund

Most of us want to stop work and retire at some point in the future, the problem of course is having enough money!

The financial crisis has not made retiring, when we are still healthy enough to enjoy it, any easier. So we thought we’d let you into our six secrets of building a big enough pension to retire on.

1) State Pension

The State Pension is all too often ridiculed, but whilst you wouldn’t want to live on it alone, it’s a great foundation to build on.

The basic State Pension is currently just over £100 per week, which works out to be roughly £5,300 per year. Not much you might say, but remember that’s index linked and will rise in line with inflation, earnings or 2.5% each year, whichever is higher.

Look at it this way, to get the same, inflation proofed income, from your own pension fund, you would need about £150,000; it doesn’t sound so shabby now does it?

Until the flat rate State Pension comes in you should make sure that you’re National Insurance record is up to date, you will only qualify for the basic State Pension if you have paid enough NI, you can check your record by visiting the government’s State Pension Calculator.

2) ‘Free’ money – part one

There is plenty of ‘free’ money to help you build up your pension; the first example of this is tax relief. If you are a basic rate tax payer, every £80 you pay in will be topped up by £20; that’s immediate ‘growth’ of 20%!

Yes, we know you are only getting tax back that you have already paid, but there is no other way of doing this and high rate tax payers can claim back an extra 20%, meaning that every £100 contribution only costs £60

3) ‘Free’ money – part two

Many employers run work place pensions; however the take up rate is often poor. The ‘deal’ is usually pretty simple, if the employee pays in then so does the employer, often matching your contributions. When most people can’t afford to put enough money away themselves, most people really can’t afford to turn down this ‘free’ money from their employer.

4) Take more risk

We admit this doesn’t work for everyone, but if you have a long time before you plan to retire, 20 years plus, we’d strongly suggest that you consider taking more risk with your pension investments, especially if you are making monthly contributions.

Many people get understandably concerned about stock market crashes and therefore take too little risk with their pension investments, preferring safer investments, such as cash, which will ultimately get eroded by inflation. If you have enough time to ride out the roller coaster ride of the stock market, consider investing with a bias towards stocks and shares, the converse is of course true, the less time you have the more risk averse you should be.

5) Start early

Everyone has a target income in retirement, this means that a target capital sum needs to be built up over the course of a working life; starting early, even with relatively small contributions, will help. Remember, the first contribution you make to a pension will work the hardest, even if you can’t pay in enough to hit your target immediately, something is better than nothing, start early and top up as you go, you won’t regret it!

6) Monitor performance and charges

It might sound obvious, but the more your pension grows and the less you are charged, the larger your pension fund will be. Regularly check how your selected investments are performing, be ruthless and ditch poorly performing funds.

When it comes to charges, cheaper isn’t always better, but getting value for money is crucial, check that you are happy with the performance of your pension and what you are paying for it, again be ruthless, if you are being charged over the odds for mediocre performance then move, your future retirement income is at stake

Next steps

Building up enough money to retire is far from easy, to start with there are many competing calls on any spare income you have, getting the right pension and choosing the right investments, only add to the complication.

Following our six secrets will help, but they will only take you so far, afterwards it’s down to you.