How much should I pay into a pension?
If you’re thinking about your retirement, that will be one of the first questions you will ask. Whether your retirement is approaching, or is decades away, ensuring you make sufficient pension contributions is the key to you maintaining your desired standard of living once you stop work.
The amount you will need to contribute will depend on a wide range of factors, and no two people will have to pay in the same amount. Firstly, we’ll look at five factors that will affect how much you need to contribute to your pension.
5 factors that will affect how much you contribute to your pension
1. When you start saving
The amount you will need to put aside for your retirement will depend on when you start saving. In simple terms, the earlier you start saving for your retirement, the lower the monthly contribution you will need to make.
Research published by the BBC* has revealed that, to achieve a retirement income of £20,000, the average person would need to save:
- £246 per month from age 25, net of tax
- £404 per month from age 35, net of tax
- £826 per month from age 45 (man), £861 per month from age 45 (woman), net of tax
So, the amount you will need to pay into your pension will depend on when you start to save.
2. What other income you expect to receive in retirement
Your pension may not be the only source of income you receive in retirement.
Research by the Department for Work & Pensions has revealed that, for the average pensioner couple, income from occupational and private pensions only accounted for around one-third of their overall income.
More than a fifth of income for pensioner couples (22%) came from earnings, while 35% of all income came from benefits (including the State Pension).
If you expect to receive the full State Pension (as you have 35 qualifying years on your National Insurance record) then this will account for a proportion of your retirement income. The full State Pension is £9,110.40 in tax year 2020/21.
Your pension contributions will therefore partly depend on how much income you want to generate, bearing in mind your income may come from other sources including work and state benefits.
3. How much you expect to spend once you retire
In 2019, consumer group Which? spoke to more than 6,000 retirees to establish what the average pensioner spends in retirement. They found that:
- The average household spent just under £2,220 a month (around £27,000 a year). This covered all the basic areas of expenditure and some luxuries, such as European holidays, hobbies and eating out
- The average household spent around £42,000 a year if long-haul holidays and a new car every five years were included.
The Which? study found that individuals enjoying a comfortable retirement spent £20,000 each year, while individuals looking for a luxurious retirement spent £33,000 a year.
Put simply, the higher your desired income in retirement, the more you will have to save to reach your target.
4. When you plan to retire
People approaching retirement now have more flexibility than ever before when it comes to choosing when they retire.
- In terms of the State Pension, the qualifying age will be 66 from October 2020, and 67 from 2028.
- If you’re in a defined contribution pension, you can generally access your money at age 55. However, some schemes will have a ‘normal’ retirement age and if you access your pension plan before this date, you may incur an early exit penalty
- If you’re in a final salary pension, you may need to contact your scheme administrator to establish when you can retire. When you can access your money is different for final salary pensions and will depend on the individual scheme rules.
The point here is that the amount of contribution you will need to make to your pension will be partly determined by the age you intend to retire.
For example, if you want to retire at age 55 then you’ll need a much bigger pension pot as the money will have to last you for, perhaps, an additional ten years or more.
5. How much risk you are prepared to take
In general terms, savers who take more risk should expect to see higher returns on their money. However, riskier investments don’t always lead to better returns, and a reduction in the value of your pension savings close to retirement may force you to save more or delay your retirement.
If you are prepared to take more risk – perhaps because you are decades away from retirement – then it is possible your pension contributions can afford to be lower.
What you should be paying into your pension
As we saw above, there is no fixed amount that an individual should be contributing to a pension. Issues such as your age, intended lifestyle in retirement, and other arrangements will all impact how much you pay.
Ask many experts and they will typically suggest that you should set aside between 10% and 15% of your annual salary. However, it’s important to remember that not all of the money will come directly from you:
- If you’re paying into a workplace pension, your employer will also add contributions to your pension under the ‘auto enrolment’ scheme. From April 2019, your employer must contribute at least 3% of your earnings
- You will also receive tax relief on your pension contributions, in the form of an additional sum from the government. The amount of tax relief you receive depends on the rate of Income Tax that you pay. You get a tax top-up of 25% if you’re a basic rate taxpayer, meaning that for every £100 you put into your pension, the government adds £25. If you’re a higher or additional rate taxpayer, you can claim a further 25% and 31% respectively through your Self-Assessment tax return.
Get in touch
If you want advice on how much you should be paying into your pension, we can help. Please get in touch by email firstname.lastname@example.org or call us on (0207) 808 4120.
A pension is a long-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 Pension Regulator
* Note: The calculations are based on a complex model that predicts the investment return over the lifetime of the pension.
Assuming it achieves investment growth of a typical default investment strategy and assuming the eventual payout increases annually with inflation, as well as granting a 50% income to a surviving partner, this level of saving has a 50/50 chance of providing an annual income of £20,000 or more.