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Seven steps to make the most of your pension

6 min read
Mark Endacott, Senior Director, Private Clients05 Jun 2024

Tax-friendly, a long-term ally, a great team player… What’s not to love about your pension?

I can’t sugar-coat it, though: to get the rewards of building a sustainable pension, you’ll have to take some steps.

The good news is that looking after your pension needn’t take enormous effort – you should choose how much or how little you’d like to get involved looking after it.

In this article, I’ll outline seven important steps to take to ensure your pension is best placed to meet your expectations over the long run.

1. Assess

Firstly, it’s important to understand where you are in the process of building a pension.

  • How large is your pension pot right now? How much you have contributed so far?
  • How well have the pension’s underlying investments performed? In other words, how well has your pension performed since you started making contributions?
  • How does your pension meet your retirement expectations? Is your pension in good enough form to contribute meaningfully to the retirement you’re hoping for?
  • Are you making the most of your tax allowances? Are your pension contributions favouring the use of your tax-free allowances?
  • If you’re an executive or director, is your current plan leveraging the best resources? Are you making the most of your pension contribution through your company?

Here’s the good news: if you don’t know the answer to any of these questions, getting to the bottom of it should not be that hard.

But it’s essential to get this step right to leverage your pension in retirement.

If you’re looking for more clarity around any of the above questions, our wealth managers at 7IM can help. With as much or as little involvement as you would like, we can source the information you need so you can understand the full picture.

2. Consolidate

Consolidating your pension into one pot has many advantages.

For one, having only one pot could save you time. No one should judge you for not wanting to spend any more time than what is necessary sorting out your finances.

In addition, a single home for your pension could make it easier for you to visualise your current circumstances.

It’s also worth considering fees charged on the underlying funds of your pension, and whether having one pot would help reduce those charges.

But there could also be disadvantages to consolidation. For instance, some pensions might offer exclusive benefits that you could lose by transferring your money elsewhere. It’s also worth considering how exit fees and potential penalties might set you back when thinking of moving pensions.

In essence, consolidating your pension could make managing your pension simpler and potentially reduce costs, but it’s always important to look closely at the potential costs, loss of benefits, and risks associated with moving them into one consolidated pot.

If you would like any assistance consolidating your pension, or assessing whether you would benefit from consolidating your pensions into one pot, get in touch with us.

3. Plan

The truth is steps 1 and 2 might feel ungenerous. Assessing and consolidating are essential steps, but it’s hard to see results right away.

This third step is much more exciting. If you’re yet to enter retirement, it’s time to think about what it looks like to you; if you’re in retirement, it’s time to think about those plans you’re yet to turn into reality.

Once you have an idea of what your ambitions look like, it’s time to find out how they fit into your life and what the journey to get there entails.

At this stage, using a professional cashflow model should help you put your ambitions in perspective and answer any questions you might have around what is required to get there, or how long it might take you.

A cashflow model should provide a detailed picture of your finances, so you can make strategic decisions from a position of knowledge.

4. Optimise

One of the big benefits of contributing to your pension is the compound effect of your contributions. Simply put, you contribute to your pension, and when it grows, that growth is reinvested along with the amount you’ve contributed, and that larger amount is invested again, and again… potentially increasing the growth rate of your pension pot.

Making regular contributions should help increase the compounding effect of growth within your pension. This is why, for those who can, contributing as early as possible, as much as possible, is important. In the tax year 2024-25, the pension annual allowance – the amount you’re allowed to put into your pension tax-free – is £60,000 per year (which reduces for high earners).

Something to note about your pension it that it is possible to carry your pension allowances forward if you haven’t used them in full in the previous three tax years.

5. Look at the bigger picture

When considering any plans towards or in retirement, it’s important to broaden your planning outside of pensions.

In fact, most financial plans might typically include other tax-friendly elements that will complement it in the broader context of a robust and sustainable financial plan.

So, at the same time, think about the tax benefits of an individual savings account (ISA), which allows you to save up to £20,000 every year, free of tax. Or perhaps, depending on your risk appetite, investing into a venture capital trust (VCT) or an enterprise investment scheme (EIS), which offers some tax relief on investments, could help you grow your portfolio.

If you own a business, there are also some options worth considering. For instance, if you own a limited company, you could contribute to a pension through your company, or you could make personal contributions into your pension.

But again, everything depends on your specific circumstances and tax treatment can be subject to future change. If you’re unsure what the optimum financial plan looks like, we’d be happy to provide some clarity on your circumstances.

6. Be in the know

I said in the beginning of this article that you should be able to choose how much you’d like to get involved in planning your journey to financial freedom, or to optimise it if you’re already there, and I stand by it.

If it comforts you to understand the details of any or all the elements of your portfolio, your wealth manager will be able to communicate that in a way you should understand.

Conversely, if you’d rather just have a regular review of your portfolio to check your finances are on the right track, that will be possible too.

Once you communicate your goals and dreams (step 3), it’s entirely up to you to decide how involved you’d like to be and your wealth manager should accommodate your preferences.

7. Wherever you are in the journey, enjoy it

Sometimes, it can feel slightly overwhelming to think about pensions, particularly in the context of your broader wealth management plan.

And that’s absolutely normal. After all, planning or optimising your financial freedom is no joke.

But it’s also important to remember you’re on a journey that you can enjoy because every single step you take in this journey will have a beneficial impact down the line.

So wherever you might be in that journey, every contribution is making a difference, and that’s getting you one step closer to achieving your dreams and ambitions.

If you’d like to discuss any aspect of your finances, our advisers at 7IM are here to help. Our team can help individuals understand, plan and execute every aspect of your financial affairs. So whether you’re looking for a financial MOT, for someone who could look after any aspect of your financial life, or if you happen to be in a different financial position, our experts will be delighted to talk to you.

Please note that this article is intended for educational purposes only and should not be taken as investment advice. Tax rules are subject to change and taxation will vary depending on individual circumstances. The value of investments can go down as well as up and you could get back less than you invested. Investment in funds will not be suitable for everybody and you should make yourself aware of the risks before investing and if you are unsure, you should seek professional advice.
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