How much should I pay into my pension?
Looking for guidance on how much you should be paying into your pension? It can be tricky to know how much money to set aside for retirement, especially when it seems a long way off. Don’t worry – this simple guide will help you decide how much you should pay into your pension.
There is no set amount to save into your pension pot, however, the basic advice is to save as much as possible from as young as possible.
With some workplace pensions schemes there is a minimum contribution level – but if you’re able to save more than this level it’s advisable to do so.
If you are in debt of any form then you should consider getting rid of those debts before paying into a pension.
When beginning to save for your retirement you should take the age you start your pension and halve it. Then put this percentage of your salary before tax into your pension each year until you retire.
For example; if you begin your pension at the age of 20 then you should pay in 10% of your salary, but if you start your pension at the age of 32 you should pay in 16% of your salary.
Although 16% of your wage may feel like a lot at first, this figure includes your employer’s contribution too – so you would only need to fund the rest.
What is a good pension pot? How much should I pay in to build one?
The larger the pension pot you can build, the better chance you have of enjoying a comfortable retirement. It is even possible to retire as young as 55, without necessarily earning a massive salary.
Making small savings over time can lead to large amounts. Compound interest over many years can build small contributions into bigger savings, so the general advice is to start saving soon; the younger, the better.
However, it’s never too late to start. All of the contributions you make to a pension are increased by at least 25% due to tax relief, so even if you are thinking about saving in the final years before your retirement it is a lot better than doing nothing.
Therefore it is easy to say that any amount of savings will make a good pension pot. That said, many people overestimate how much they’ll need to live on in retirement, thinking that they’ll spend the equivalent of their wages from when they were working.
The general advice is that you’ll need between half and two-thirds of the final salary you had when you were working, after tax, to maintain a happy and comfortable lifestyle during your retirement.
This is due to many different aspects: some people might have paid off their mortgages, others will no longer be raising children, and many won’t face the cost of commuting during retirement.
What is a good pension pot at 55? And how much should I pay in?
A lot of people begin thinking about their pension more when they reach 55, as retirement begins to appear on the horizon and this is the age from which you can begin claiming your pension pot.
Anyone with a pension pot can access it however they wish from the age of 55. However, it’s usually beneficial to preserve your pension pot for as long as possible before cashing in any of it, because it will be your main income in retirement. Due to this, retirement for most people will usually come in their mid-60s.
But what if you wanted to or have to retire early? How much money is a comfortable amount to live on during your retirement?
A good way to estimate this figure is the ’70% rule’, which advises that you will need 70% of your current working income to maintain the lifestyle you want in retirement. For example, if you retire on a salary of £50,000 you would be looking at having a salary of £35,000 per annum.
For some people 70% may be rather generous and you might find that you would be more comfortable living on less, others may struggle and want to save more.
You should also factor in receiving state pension if you qualify for it. State pension age is currently 65 for most people and is expected to be 68 by 2044. Currently the maximum state pension pays around £8,767 per year, so you may be able to take this into account when forming a long term retirement plan.
You can only benefit from the maximum state pension if you’ve paid 35 or more years worth of National Insurance contributions. The state pension is also triple-locked at the moment, which means it will always at least keep pace with inflation unless the government decides to alter this.
What is the average pension pot?
The average pension pot in the UK differs between regions and the gap is generally due to a difference in living and housing costs in those areas. For example, If you live in London, you’re likely to have less than the average retirement income. But if you’re based in Scotland or the North East of England, you’re likely to have more to spend on average.
The government’s most recent data, from 2017-18, showed that the average weekly income for UK pensioners was £304. This figure has remained very stable for the past decade: in 2009-10 it was very slightly higher. at £307.
This most recent figure – £304 – comes to £15,080 per year, and is calculated by taking away taxes and additional housing costs.
The average pension pot also depends on what you plan to do during your retirement. On average, a couple in the UK need an combined income of £47,500 per annum to have a retirement with little to no financial worries. A single person would need a salary of approximately £33,000 per annum.
These figures are calculated on the assumption that your retired lifestyle would include things such as:
- Weekly food shops of £56 per person
- Three weeks’ holiday in Europe each year
- Annual spending of £1,500 per person on clothes
Obviously, these are only suggestions and many people live comfortably on much less than the above suggests, for example if you wouldn’t be spending this much on clothes or going on as many holidays.
If you do have concerns about your pensions savings, don’t worry – we are working on a pensions calculator that will help you predict how much you will have saved at your desired retirement age.