5 practical ways to protect your pension savings in challenging times

Planning and saving for the future in the current economic climate can feel especially daunting. With inflation at a 40-year high of 9.9%, we’ve all noticed the rising cost of living somewhere in our day-to-day budget.

When we need to balance today's costs with protecting our future finances, things can be even more difficult to figure out.

On one hand, we're dealing with keeping up with everyday spending with a close eye on the ever-increasing costs. Meanwhile, we also need to keep a firm grip on our future financial needs.

Nothing about the current circumstances is easy, so here are five practical tips for how to protect your pension savings.

1. Maintain workplace pension contributions

The single most important rule in pension planning, however tough the economic climate, is to never drop out of saving through a workplace pension.

There are several reasons why workplace pensions are a valuable asset to maintain. Most notably, because contributions are taken out of your gross salary, they immediately cut your tax bill. That's a great start but, on top of that benefit, they also attract tax relief from HMRC.

Tax relief is applicable on all UK pension contributions up to your Annual Allowance, which for the 2022/23 tax year stands at £40,000 (or100% of earnings, if lower).

Paid at source, the basic rate of 20% means that for every£100 you contribute to your pension, you are effectively only paying £80, with the other £20 being added by the government.

Higher- and additional-rate taxpayers can claim further relief of up to 20% or 25%, respectively, through self-assessment.

Plus, because employers must also contribute to your pension pot, your workplace pension is guaranteed to be even more worth your while, with money added by your employer, over and above your salary.

2. Keep up with regular savings

Once you’ve made your pension contributions, you can bolster these with extra savings. It needn't be a large amount. For example, in the UK you can open a stocks and shares ISA with as little as £25 a month. Your annual ISA allowance means you can save up to £20,000 tax-free every year.

Put away a small amount each month and you can soon build up a substantial pot. Regular investing is a powerful discipline that you can use to build your wealth.

Read more about regular saving here, but the sooner you start, the better.

3. Look for cost-cutting opportunities

If money is tight, look for opportunities where you can cut your costs. Take the time to review your budget and see exactly where you're spending your money. Once you know where your money is going, look for deals where you can make savings.

Be methodical and look for savings with all your weekly and monthly shopping and spending habits.

For example, can you save by buying in bulk? Or are you paying for a subscription service that is no longer providing the value it once did?

Taking control of your spending should help you feel better about your finances. Staying in the dark and burying your head in the sand can cause worry and affect your mental and financial wellbeing.

Read more: 5 ways to protect your financial wellbeing in tricky economic times

In the best case, you may find that sorting your budget frees up some extra cash you could use to boost your long-term savings.

4. Consider whether you can take advantage of the current situation

If you expect to retire within the next few years, it's important to decide how you plan to take your retirement income. Ideally, you should allow for increasing costs and expenditure so that your spending can rise in line with prices.

One way you could achieve this is by buying an annuity that offers some protection against inflation. Alternatively, you could leave some of your pension invested in assets that have the potential to keep pace with higher living costs and take only a small amount of income through drawdown.

If you have additional savings, in tax-efficient ISAs for example, consider leaving your pension invested longer and use these savings to provide your income while the economy is difficult.

This strategy has multiple benefits, most notably that money you take from an ISA is tax-free.

In addition, because pension schemes don’t form part of your estate, they can be passed to your beneficiaries free from Inheritance Tax.

5. Relax when you know when you’ve done what you can

It can be hard to resist the temptation to do something when the world around us is in flux.

Remember, by following the steps above you will have done what you can to help you get through this difficult period. Now the best thing you can do is to make sure you understand how you want your retirement to look and how you’ll afford it.

The biggest risk in all of this is falling far short and leaving yourself unable to afford your desired lifestyle. So, make sure your savings are working as hard as they can, which is where we can help.

Get in touch

Our advisers provide specialist advice to British expats and international employees living around the world. We provide tax-efficient and tax compliant solutions for those that have decided to leave the UK and have found a new home overseas.

We put your long-term goals at the centre of the financial plan we put in place for you, helping you to make your dreams a reality.

If you’d like help reviewing your finances considering the current economic climate or to talk about how to make your money work harder amid high inflation rates, please get in touch.

Email us at enquiries@alexanderpeter.com or give us a call on +44 1689 493455.

Please note:

The content of this newsletter is offered only for general informational and educational purposes. It is not offered as and does not constitute financial advice.

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is along-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 tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

Workplace pensions are regulated by The Pensions Regulator.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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