OK, now we've reviewed our pensions and investments, let's take a bigger step.
Confirm how Much You’re Paying in, and Increase it
It’s important to know how much you’re paying in to your pension. If your employer is also paying in, then that’s good to know too. Usually in an occupational pension your employer will pay in a percentage of your salary.
If you get a bonus, or London addition or overtime or whatever, usually your pension contributions will be based on your basic salary only, but find out for sure. Ask your employer what is the maximum amount you can put in and still get a matched amount from them.
If they will match you up to 10% salary, then you need to do everything you can to take them up on it. I have one client whose employer will double-match up to 9%. So he’s paying in 9% and getting 18% from his employer, that’s a decent contribution level, for sure. Try to put in the maximum you can to get the employer match, to do anything else is to leave free money on the table.
Even if this isn’t an option for you, and maybe you’re self-employed so there’s no employer paying in for you, try to increase what you’re paying into a pension. Remember that you get tax relief for paying into one, so HMRC actually puts money into your pension for you. If you’re a higher-rate taxpayer, you can even get money off your tax bill – so that’s got to be worth doing.
The trick to winning with wealth-building over time – well, one of the tricks, anyway – is to regularly increase your payments by small amounts. It’s like boiling the frog. You turn up the heat slowly so it doesn’t know it’s being boiled. You get used to paying a small pension payment, and then you increase it.
Then you increase it again a few months later. Do this every 3 to 6 months until it starts to hurt, then stay where you are for a while. As soon as you’re used to the higher amount, increase it again. Your future self will thank you, and you can buy me a beer when we’re both retired. Regular, small increases really are the secret sauce.
There is an annual allowance which you should stay within each year. That figure is £40,000 or 100% of your salary, whichever is lower. Be aware of this, and if you think you’re getting anywhere near it, then check with your accountant, or the pension department at work or your pension provider, and make sure you know what you’re doing if you’re getting near that annual allowance.
You can carry forward unused annual allowances from previous years, but it’s a personal contribution you still can’t go over your relevant earnings in the year that you’re making the pension contribution. If you own a company and the company is paying in for you, that’s different, but talk to your accountant or financial planner about that.
Consider Salary Sacrifice
If you are in a pension scheme at work, consider salary sacrifice. This is a method of contractually reducing your pay and having it sent to your pension instead as an employer contribution.
This reduces your income tax of course, but also your national insurance. It also has the benefit of reducing your employer’s national insurance and some employers offer to pay that into your pension too, so it can be a very useful way of getting the most into your pension.
Usually you have to commit to the salary sacrifice for a full year at a time, so consider it carefully. There are sometimes implications if you’re getting a mortgage as well, so go in with your eyes open. Seek advice if you’re in any doubt.
Review Annually
And finally, commit to reviewing things regularly – annually is fine. You don’t need to review it any more than that unless there’s a big change, such as changing employer. You’ve done good work as you’ve gone through this checklist. By now you should have all your pension ducks in a row, and you need to keep them there.
Fortunately this should really take you more than an hour or so per year because you’ve already done the hard work, getting things tidy in the first place. Jim Collins, who wrote the book I mentioned in the last post, The Simple Path to Wealth, has his annual financial review on his wife’s birthday each year as it’s an easy date to remember.
Choose a date that works for you and stick to it. Put it in your calendar and do the work necessary to keep everything tidy each year. The key benefit of this discipline, of course, is that you don’t have to think about it for the other 364 days, and that’s got to be a good thing.
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