4 practical ways to avoid a pension shortfall upon retirement

The expected prize at the end of your working life is the fruition of your life’s hard work – a comfortable retirement.

It is a chance for you to enjoy the kind of lifestyle you’ve built towards. But what can you do if you find yourself approaching retirement with a pension shortfall?

According to Unbiased, a high-quality retirement that allows you to live life to the fullest and enjoy yourself with long-haul holidays, and big purchases such as a new car, is expected to cost a single person at least £31,000 a year and £41,000 for a couple.

Unbiased also reports that approximately 1 in 6 Britons over 55 have no pension savings set aside outside of their reliance on the State Pension, which as of the 2022/23 tax year works out as just over £9,627 a year.

For many soon-to-be retirees, this creates a looming pension shortfall of approximately £21,000 a year between them and that high-quality level of retirement.

If you’re worried that your current pension savings might leave you with a shortfall – don’t panic!

A smart financial plan can help you get back on track to meet your retirement goals. Discover a few key steps you should take to avoid a pension shortfall.

  1. Ensure you maintain your pension contributions

Your pension will most likely be your primary source of income upon retirement. It is important to maintain your monthly contributions even when short-term pressure can make cutting or reducing them a tempting option.

The pandemic put additional financial strains on many households and millions of over-50s made the hard decision to cut their pension contributions to make savings.

However, This is Money reports that over-50s who opted out of their pensions during the pandemic could be £50,000 worse off when they reach State Pension Age if they didn’t resume contributions.

The more you earn, the more sizeable the ramifications of cutting pension contributions for your eventual pension pot.

Under current workplace pension auto-enrolment rules, the minimum pension contribution is 8%, made up of a 5% personal contribution (including tax relief) and 3% from your employer.

If you opt out of your contributions all together, you will not only miss out on any savings you would have put aside but you will also be giving up essentially “free money” in the form of your employer’s contributions.

You will also miss out on other great benefits such as:

  • Tax relief from the government on all pension contributions up to the Annual Allowance, which stands at £40,000 (or 100% if earnings are below this threshold), for the 2022/23 tax year.
  • Tax relief is automatically paid at the basic Income Tax rate of 20%. This means for every £250 you contribute to your pension, you are only effectively paying £200, with the other £50 being added by the government. If you’re a higher- or additional-rate taxpayer, you can claim additional relief through your self-assessment tax return.
  • “Compound returns” arise from the long-term growth of your pension investment, a benefit that can increase over time.

Finding alternative ways to cover short-term bills and maintaining your pension contributions can help you ensure your pension pot remains on track to achieve your retirement goals.

  1. Don’t lose track of your workplace pensions

Over the course of your career, you are likely to change jobs several times and, in doing so, you may find yourself switching workplace pension providers.

During the transition, an easy oversight to forget to update your old workplace pension provider with your new details and keep track of the funds you’ve accrued that you’ll want to claim come retirement.

A report in Pensions Age details how £37 billion has been lost or is lying dormant in pension pots, averaging a value of £23,215 among 1.6 million UK savers.

This could potentially make up another significant chunk of your attempts to cover any potential pension shortfall.

So, what can you do if you’ve lost track of an old pension plan?

The government website offers support in working out how to trace any pensions you might have lost. Alternatively, you can speak with us for advice.

Locating a lost pension could possibly provide your pension with a windfall as it may have been generating investment returns for years on top of any amount you and your old employer originally contributed.

  1. Make sure your surplus cash savings aren’t losing “real” value and are generating growth

Diversifying your income in retirement can be an important step that takes some pressure off your pension plan. This may come in the form of cash savings, ISAs, or investments.

Millions of Britons are allowing their cash to sit idly in easy access savings accounts, while current high inflation of 10.1%, according to the Office for National Statistics (ONS) figures, erodes its “real” value over time.

The Express reports Bank of England (BoE) figures that show more than £1 trillion in UK savings is currently sat in accounts with an average interest rate of 0.18%.

If you have at least three months’ worth of rent and essential bills set aside in savings for emergencies, then you should be looking at ways to maximise the returns on your surplus cash.

At current inflation, £1,000 worth of goods and services a year ago would cost £1,101 today. Inflation is expected to continue to rise into next year and the Guardian reports that it is forecast to potentially reach a 50-year high of 18% in early 2023.

By moving your surplus cash into a tax-efficient option like a Cash ISA or by taking a riskier approach and investing your funds in the stock market, you are more likely to generate the growth needed to reach your long-term goals.

  1. Consider ways to keep income flowing for as long as possible

Ultimately, continuing to work might be the simplest way to overcome a pension shortfall. This is Money reports that approximately 30% of Britons are continuing to work into their 60s.

Delaying your eventual retirement doesn’t mean you need to continue to work full-time. There are many part-time opportunities available, especially if you’ve developed a lengthy CV over the course of your career and a wealth of professional connections.

Reducing your working hours to part-time or shifting into a consultancy role can help keep income flowing for as long as possible until you eventually decide to fully retire.

It can also help you to make up any potential shortfall between your current savings and your desired goals.

Get in touch

Saving into your pension pot is key to achieving your desired level of retirement lifestyle. It is never too late to put a plan together.

For advice on your pension, or other areas of your personal finances that might be worrying you, please email [email protected] or call us on 0345 505 3500.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.