Boost your pension by £130,000 before you retire

by Jane Baker on 13 June 2010  |  10 comments
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Check out these five easy ways to boost your pension pot!

Almost one in five Brits say they can’t afford to save in a pension, according to a recent survey from Aon Consulting. That’s a pretty worrying statistic. Worse still, the survey also revealed that 5% claim they have made the decision to rely on nothing more than state benefits in retirement.

When you think how low the basic state pension really is - it pays little more than £5,000 a year assuming you qualify for the full amount - not saving for your retirement means you are taking a huge risk.

You might argue because some retirement benefits are means-tested benefits, such as pension credit, saving for a small pension doesn’t make good financial sense. That’s because you could actually end up no better off by saving if your means-tested payments are reduced as a result.

But this seems like a dangerous tactic to me. If state provision is cut in the future, you could be left completely high and dry. You can find out more about this in Why pensions aren’t always worth it.

I think by making sensible cutbacks to your budget now, before you retire, you can free up some extra cash to invest in a pension. Even if you can only afford a relatively small contribution to begin with, something is always better than nothing.

Here are five ways you can do just that:

1. Cut back on luxuries

I’m not saying you have to ban all treats, but there must be one or two regular expenses you can live without.

I’m sure you must have come across the ‘take a packed lunch to work’ tip countless times, but it’s true. I’m guilty of buying shop-made sandwiches far more times than I should. In fact, I’ve just calculated if I bought my favourite sandwich every working day this month, it would cost me a total of £61.87! I reckon I can make a homemade version for half that, so I can immediately free up around £30 in one easy step. I’m sure you can too.

£30 may not sound like much, but if you saved that amount every month for the next 35 years, you could end up with a pension worth £28,700* - and this is just the beginning.

2. Stay in one extra night each month

If it’s your weekly routine to head down to the pub every Friday night, or take your other half out for dinner, you could give it a miss once a month.

Let’s say you normally spend £25 on after work drinks. If you took a £5 bottle of wine home instead, you would instantly create an extra £20 every month.

This could add another £19,133* to your pension pot by the time you retire.

3. Reduce your household bills

Are you paying as little as possible for all your household bills? If you’re not, you should be. For example, if you switched your energy tariff through the lovemoney.com gas and electricity comparison tool you could save an average of £206 a year.

Likewise, combining your broadband, home phone and TV into a bundled package could save up to £210 a year, according to BroadbandChoices.

These two savings alone could mean you’ll be able to direct another £35 into your pension pot every month. That’s a saving of £17 a month on your energy bills and £18 a month for broadband. Together this could increase your total fund value by £33,483*.

Join our Lower your household bills goal to discover lots more great tips for saving money on your energy, water and communications bills as well as council tax and insurance policies.

4. Remortgage

Your mortgage is probably your biggest monthly bill, so it follows that this is where the greatest savings can be made. These days the best deals are reserved for borrowers with a lot of equity in their homes, but you should still hunt around for the most competitive choice every time your special rate comes to an end.

Any reduction in your mortgage rate can equal a decent saving. For example, let’s say you have a £125,000 loan and you pay a fixed rate of 5%. This means your repayments are £763 a month. After your fixed term ends, you move to a new lower fixed-rate deal with a rate of 4.5%. This cuts your repayments to £728 a month, generating another £34 a month for your pension.

This could increase your final value by £32,527*.

For help finding the best remortgage deal for you, visit the lovemoney.com mortgage service.

5. Increase your income

Before you start panicking, I’m not suggesting you take a second job just to fund your pension! But if these cutbacks are still leaving you short on extra cash, you could try stepping up your income.

For example, if you have a spare room, you can earn up to £4,250 a year tax-free by renting it out to a lodger through the ‘Rent a Room’ scheme.

If you don’t like the idea of sharing your home, what about renting out your garage or driveway instead? You can even earn a bit extra by selling your old junk, or turning something you enjoy doing as a hobby into a money spinner - such as selling your own photographs or crafts. Find out how by checking out our Make some extra money goal.

Let’s say you earn an extra £20 a month this way, which means another £19,133* boost to your pension.

By following these five not-too-difficult steps, you’ll have an extra £139 every month which rises to £173.75 with 20% tax relief added on. All this means your pension could be worth a total of £132,976* by the time you retire - and you haven’t even had to make any drastic changes to your lifestyle.

*Assumptions: Figures are based on a 30-year old saver who is a basic rate taxpayer, and therefore qualifies for 20% tax relief on contributions. The fund grows at 7% pa and an annual charge of 1% is deducted. Contributions increase by 2.5% pa to keep pace with inflation. The final value has been adjusted to take account of inflation at a rate of 2.5% pa. Retirement takes place at 65.

More: How David Cameron plans to mess with your pension | Stop using a pension to save for retirement!