How to make up a pension shortfall


Figures released last year confirmed that the average pension pot on retirement is just £61,897. The Guardian report confirmed that a fund of that size amounts to ‘an income of only £2,500 a year’. Add the State Pension to that – £9,110.40 a year for the 2020/21 tax year – and, the report continues, ‘you’ll still be below the current minimum wage.’

So what options are open to you if you think you might be suffering from a pension shortfall?

Here are some ways you might begin to bridge the gap.

1. Top up your pension

The most obvious way to make up a potential pension shortfall is by topping up your pension.

You can contribute up to £40,000 or 100% of your income (whichever is lower) each tax year and benefit from tax relief – this is known as the Annual Allowance – so pensions are incredibly tax-efficient.

Be aware of the Lifetime Allowance (LTA) too. The LTA is the overall limit on the value of pension funds you can hold. It applies to all pensions you have, excluding the State Pension, and an LTA charge can be levied if the limit is exceeded. For the 2020/21 tax year, the LTA is £1,073,100.

Bear in mind that your Annual Allowance might differ depending on your circumstances.

The Tapered Annual Allowance applies if you are a high earner, with a salary of over £200,000. The taper reduces the standard Annual Allowance by £1 for every £2 of income you receive if your ‘threshold income’ is over £200,000 for the 2020/21 tax year.

The reduction is applied to ‘adjusted income’ over £240,000 and could reduce your Annual Allowance to just £4,000.

The Money Purchase Annual Allowance applies once you ‘flexibly’ access any taxable DC funds you hold and also reduces your Annual Allowance to £4,000. The reduced limit is partly in place to prevent people from cashing in a pension and then re-contributing it, taking advantage of the tax relief on contributions.

If you’re thinking of taking a DC pension whilst continuing to contribute, you’ll need to be aware of this reduced allowance.

2. Review your other assets

ISAs are another tax-efficient way to save. Any interest earned from a Cash ISA is tax-free and any gains you make on investments in a Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax (CGT).

If you hold an ISA, the current ISA allowance is £20,000. If you can afford to, make the most of this allowance in the run-up to your retirement and use non-pension funds to supplement your income in retirement.

Making use of the full ISA Allowance is especially important because it can’t be carried over into the next tax year.

But an ISA might not be your only investment option.

If you have money to invest, consider a Unit Trust or an Open-ended Investment Company (OEIC) as a way to see your money grow in the approach to retirement.

The important thing is to remember that your pension is unlikely to be your sole source of income in retirement, so factor all your assets and investments into your financial plan.

3. Lower your other outgoings

If you’re taking any high-interest debt or a mortgage into retirement, a portion of your pension savings will inevitably go towards paying off this debt, rather than on helping you to achieve your desired retirement lifestyle.

Whatever your age and however far off your retirement might be, beginning to plan for retirement early could mean going into retirement debt-free.

Although you might have big plans for house renovations or travel, remember that you might find that your day-to-day expenses fall in retirement.

Which? confirms the general rule of thumb that ‘you’ll need between half and two-thirds of the final salary you had when you were working, after-tax, to maintain your lifestyle once you retire’.

Financial planning is crucial in understanding not only your current pension provision but how that provision is likely to stretch into your retirement. Speak to us for advice if you’re worried about having to lower your standard of living during retirement and we’ll help work out a plan for you.

4. Delay your retirement

By putting a financial plan in place as early as possible you give yourself the best chance of retirement when you choose. A delay in taking your pension might still be an option worth considering though.

Delaying retirement doesn’t have to mean continuing to work full-time, nor must it mean continuing to work in the same role.

A move to part-time or into a consultancy position might allow you to supplement your retirement income whilst still making use of the skills you’ve built up throughout your career and enjoying the social life attached to your working life.

Get in touch

The surest way to avoid a pension shortfall is by putting a financial plan in place early and checking in with that plan regularly to ensure you’re on track.

We can help you with that so if you’re worried about a possible pension shortfall, speak to us. Please email or call 0115 933 8433.

A pension is a long-term investment not normally accessible until 55. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.