How should I treat my small pension?



I have a modest pension pot of £30,000 and am wondering what the most sensible plan would be for this money. I am a self-employed piano teacher and have reached state pension age, but have deferred my state pension so that it will increase in value.

I will not receive the new “single-tier” pension, £155 per week, since I was born in November 1952. I realise I will always have to work as my pension income will be quite low and I have to be very careful with that small private pension pot.

What would be my best option for this money?

FT, via email

Working out how much income you actually need will be key to deciding what to do with your pension savings.

If you can afford to, adding more to your retirement fund is a sensible idea, as the tax relief will give your savings a significant boost. If you are a basic-rate taxpayer, the Government will add £20 to your pension for every £80 you invest.

With some careful investing and planning, you might end up with a higher income than you expect, according to Nero Patel, a financial planner at Canaccord Genuity Wealth Management.

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Working towards a five-year goal based on how much income you imagine you will need, while deferring the state pension, is a good start.

You should obtain a forecast from the Department for Work and Pensions so that you know exactly how much state pension income you can currently expect, which will help you work out how much you need to save and how much you will add by deferring.

“Your private pension could secure an annuity today worth around £1,560 before tax each year, providing you with around £130 per month before tax,” Mr Patel said.

“You should obtain a forecast for your state pension, but I would estimate it to be worth around £135 a week.

“You would therefore have around £8,800 of annual income available at present if you were to decide to stop working in the near future.”

But Mr Patel added: “If you are able to save a little each month into your private pension and continue to defer the state pension, you should be able to improve your retirement provision.

“Your state pension will increase by 10.4pc each year that you defer taking it and this could mean that it may increase to around £200 a week in around five years’ time, so it would significantly improve your finances.”

You should also review your pension and find out how it is invested, making sure that it matches up to your own plans and appetite for risk.

“If you do plan to work for as long as possible, it would be a good idea to invest for long-term growth,” Mr Patel said.

“If you do not have any other savings, your pension pot should be invested cautiously in order to protect it from market volatility.”

He also suggested that you seek advice on ensuring that the investments in the pension remain aligned to your personal risk tolerance and investment time frame.

“If you decide to add more money to the pot then you may feel comfortable with taking a little more investment risk, as monthly savings tend to benefit from something called ‘pound cost averaging’, which means that you end up buying more shares when markets fall.

“Over the long term, assuming that prices end up higher, this should mean you make more profit,” he added.

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