Your pension is likely one of your single biggest life investments and it’s incredibly important, because the size of it determines your quality of life in retirement and needs to account for the longevity of it when you retire. People are living longer and wages aren’t keeping pace with growth, meaning people are struggling to adequately invest in their pensions. Even with proper management, learning to be frugal with the money in your pension is just as important but less often mentioned. This article will cover how to be frugal with your pension.
Check your pension plan
There are different types of pension and they each have different functions and requirements, so it’s important to know which type of pension you have and whether you find the terms agreeable. The two most common types of private pensions are defined contribution pension and defined benefit pension plans. Unfortunately there are cases of pension mis-selling, where someone is mis-sold pension by misrepresentation, usually exaggerating the benefits beyond what the person is likely to get or having conditions which are unlikely to be met. If you feel you have a mis-sold pension, get claims advice and make a claim against who mis-sold you the pension.
Draft a budget
Yes, believe it or not, even in retirement you should have a budget! It’s all the more important to create a budget for your pension, because it is a finite amount of money and having a budget allows you calculate expenses and make projections. This allows you to understand how long your pension will last at different spending levels. Knowing how much you can afford to live on for a set period of time gives you an idea of how frugal you should be with your pension.
Consolidate your retirement savings
There’s a good chance if you’ve changed jobs once or twice in your life that you have multiple pensions. You may have had a defined benefit pension with one employer but a defined contribution pension plan with another. Having different pensions in different places can be confusing and difficult to manage, so consider consolidating your pensions. Gathering all your pensions and putting them into one provider not only simplifies your finances, but allows you a closer look at your various pension plans to see if you need to get claims advice or make a claim for pension mis-selling.
Squeeze every penny out of your pensions
Pensions are a confusing mess of taxes, contributions and legislation. The government does offer a range of tax relief benefits on pensions, so make sure that you’re getting all the tax relief you’re entitled to. Contacting HMRC or getting in touch with an accountant can help make sure that you’re maximising your pension by using and claiming everything you’re entitled to.
Manage your pension throughout
Even within pension plans, many providers will offer you a range of options for your pension. These typically balance how much risk you are willing to take with the investments chosen for your pension money. Higher risk means you have a bigger chance of your pension value going down as well as going up. Lower risk means your money is placed into investments considered ‘safer’, less likely to go up by much but also less susceptible to the risk of losing money too. Generally speaking the market grows over time, so depending on how many contributing years you have left it’s advisable to stick your money in higher risk funds when you are young, then move to low risk a few years before retirement.