The Secret Sauce: How to Make Your Pension Work Harder for You

The Secret Sauce: How to Make Your Pension Work Harder for You

Let's be honest: pensions are not exactly the most exciting topic. But if you have ever thought, "Surely there is more I could be doing with mine?" you are absolutely right.

Most people set up their pension once and then leave it untouched for years. The reality is that your pension is likely one of your largest assets, and treating it as a passive account rather than an active investment strategy could be costing you significantly.

You do not need to become a financial expert to optimise your pension. You simply need to understand a few key principles and review them regularly.

Review Your Contribution Strategy

When did you last review your pension contributions? Many professionals set their contribution level years ago based on different financial priorities and have not revisited it since.

Even modest increases to your contributions can compound substantially over time. If you are paying in the minimum to receive employer matching, you may be missing an opportunity to build wealth more aggressively during your peak earning years.

For business owners and directors, the flexibility to make larger contributions in profitable years (using carry forward rules for unused allowances) can be particularly valuable for both retirement planning and tax efficiency.

Maximise Employer Contributions

If you are employed, ensure you are receiving the full employer match available to you. Many companies will match contributions up to 5%, 6%, or even higher. Failing to contribute enough to receive the full match is effectively declining free money.

For directors of your own company, consider whether employer contributions from company profits might be more tax-efficient than taking equivalent salary or dividends.

Understand Your Tax Relief Entitlement

Every pension contribution receives tax relief at your marginal rate. For higher-rate taxpayers, a £100 contribution effectively costs £60 after relief. For additional-rate taxpayers, it costs £55.

Many higher earners do not realise they need to claim additional tax relief through their self-assessment return. If you are paying tax at 40% or 45% and have not claimed this relief, you may have left substantial sums unclaimed.

Review Your Investment Strategy

Your pension is not simply a savings account. It is an investment portfolio, and the allocation of those investments matters significantly to your long-term outcomes.

Many people remain in default funds chosen when they first enrolled, which may no longer be appropriate for their age, risk tolerance, or retirement timeline. Default funds often become increasingly conservative as you approach retirement, which can be suitable for some but overly cautious for others.

If you have not reviewed your pension investments in the last few years, it is worth examining whether your current strategy aligns with your goals. Are you taking appropriate risk for your timeline? Are your funds performing competitively? Are the fees reasonable?

For those with multiple pensions from previous employers, consolidation can simplify management and potentially reduce fees, though this requires careful analysis of any protected benefits you might lose.

Maintain Perspective Through Market Volatility

Markets fluctuate. This is normal and expected. The key to successful long-term investing is maintaining your strategy through short-term volatility rather than reacting emotionally to market movements.

If you have a decade or more until retirement, market corrections are opportunities, not disasters. Consistent contributions during market downturns allow you to purchase more units at lower prices, which compounds favourably when markets recover.

Take Action

Your pension is likely to be worth hundreds of thousands of pounds by retirement. Treating it passively rather than strategically could be costing you tens of thousands in eventual retirement income.

The steps are straightforward: review your contributions, ensure you are claiming all available tax relief, confirm your investments are appropriate, and maintain a long-term perspective.

If you would like an objective assessment of whether your pension strategy is optimised for your circumstances, we can help.

Book a Free Consultation with Gavin here