Stop price rises damaging your retirement spending power

2nd March 2022

As inflation soars to its highest level in a decade, maximising your pension allowances becomes even more important for protecting your retirement income

The quick read
• Rising prices could damage your spending power in retirement, so review your pension plan to make sure it can still meet expectations.
• The longer your money is invested, the more it can potentially grow, thanks to the power of compounding – so maximise your pension contributions today.
• You get an automatic 20% top-up for basic-rate tax relief with all personal pensions. If you’re a higher-rate taxpayer, you can claim extra relief.
• This tax year, you get tax relief on up to £40,000. But you can carry forward any unused allowance from the past three tax years.

With inflation soaring, you may need to review your pension plans urgently to stop price rises damaging your future standard of living in retirement.

Many individuals have been lucky enough to maintain income security and even save money during the pandemic. Missed holidays and leisure trips have meant more money in the bank, which you can put to work topping up your pension pot.
You may think that short-term stock-market volatility is the biggest risk to your pension savings, but not if you have a long time until you retire (and you stay invested). In fact, the biggest threat to your retirement income is inflation, which may erode the value of your pension savings over the years. So, understanding the difference, can have an impact on how much you save each year and on your spending power.
The current tax breaks available to pension savers are still attractive, and higher inflation makes it critical to take advantage of them now. Doing so could make all the difference to your future income.
The early bird catches the worm
You may be young enough to think retirement is a long way away and that it’s too soon to consider pension planning. However, the earlier you start saving into your pension and the longer your money is invested, the more it can grow – thanks to the power of compounding.
Compounding happens when your investments grow, for example through dividend payments from equities, and then achieve additional growth on the new larger balance each year, increasing exponentially.
Make the most of current tax breaks
You get an automatic top-up for basic-rate tax relief with all personal pension contributions. The government pays that money directly into your plan, via your pension provider.
If you’re a basic-rate taxpayer and have £4,000 to invest in your pension, you’ll get £1,000 in tax relief on day one, bringing your total contribution up to £5,000.
If you’re a higher or additional-rate taxpayer, you can claim even more tax relief via your annual tax return.
Carry forward unused pension allowances
You can invest as much as you like into your pension, but you currently only get tax relief on up to £40,000 of pension contributions in each tax year, or 100% of earnings if lower.
You can also mop up previous years’ allowances, which means some individuals – such as the self-employed, if they have had a good earnings year – can make a significantly larger pension contribution in a single tax year.
Providing you have already maximised your current year’s allowance, you can carry forward any unused allowance from the past three tax years. That means you could add up to £160,000 to your pot, if you have the earnings to support that.
If you’ve made the most of your allowances this year, consider topping up your spouse’s pension or paying into a child’s pension. Even if your spouse or child is a non-taxpayer, they will still enjoy 20% tax relief on contributions up to £2,880 a year.
Paying in can reduce your tax bill
Pensions tax relief on personal contributions is automatically paid at 20%, so if you’re a higher-rate or additional rate taxpayer, you can claim the additional 20% or 25% in your self-assessment tax return. The further tax relief is paid to you as a cash sum on completion of your return. So, by paying more into a pension, you’ll pay less tax, leaving you even more to put towards your retirement.
Invest wisely
The assumptions you made when you first took out your pension – including inflation expectations – may not be the same today. Your portfolio of underlying investments may also have changed in nature. So, it’s worth getting good financial advice to make sure your investment strategy is still right for you. While the idea behind a pension is simple, making the most of it is complex, so get in touch with us for advice.
Five ways to stop inflation damaging your retirement spending power
1. Start saving into a pension as early as possible, even with relatively small amounts
2. Maximise your annual allowance if you can
3. Carry forward unused pension allowances if you have the earnings to support it
4. Paying into a pension can help reduce your taxable income, allowing you to save even more into your pot
5. Review your investment goals, including inflation assumptions, to see if they’re still appropriate and will support your expected lifestyle in retirement
Learn more about how to start investing in your pension.
Get in touch with us today to find how how you can build a holistic retirement plan tailored to your financial goals.
The value of an investment with St. James’s Place will be linked directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.