There is no one size fits all number when it comes to paying into your pension. The ideal amount for you all depends on:
- The cost of living
- The lifestyle you want in retirement
- How far away from retirement you are
- Life expectancy
- What is affordable for you right now
So how do you use this information to work out how much you should be contributing to your pension? Let’s start at the beginning.
Why are pension contributions important?
Pensions are the best way to save for your retirement. You receive tax relief on the contributions you make, and your savings get invested in stock market shares, meaning your funds have the potential to grow much more than if they were in a bank account.
If you are eligible for the State Pension, it’s likely that this income alone won’t be enough to live comfortably in retirement. The money you save in your personal or workplace pension is a great way to boost this income, making it easier to live the life you want.
What is the minimum pension contribution?
For workplace pensions, there is a minimum pension contribution of 8% of your earnings. This 8% is split between contributions made by you and your employer. So, typically your employer will pay in 3% while you contribute the remaining 5%. And you can choose to pay in more if you wish to do so.
How much should my pension be worth when I reach retirement?
The best way to work out how much you should be paying into your pension now is by estimating how much you are likely to need to last you throughout retirement. Then you can work backwards from this figure to calculate how much you would need to pay in each month to reach this goal.
Start by deciding on the type of lifestyle you want to lead and if there is anything you want to achieve or experience. A revealing report by Which? analyses three different types of lifestyles from essential to luxury. This report delves into the average costs associated with each lifestyle both for single and two-person households, giving you an idea of the income you will need.
Take into consideration the income you will also receive from the State Pension.
How much will I receive from the State Pension?
If you are eligible to receive income from the State Pension, you will receive £141.85 per week for the basic State Pension, or £185.15 for the new full State Pension (April 2022). The income you will receive all depends on the National Insurance contributions you have paid. To receive the full State Pension you will need to have paid 35 years’ worth of contributions. If you think you will not have paid the full 35 years by the time you retire, you can look into paying more National Insurance contributions now to make sure you are eligible for the higher income.
Putting it all together
Once you know the type of life you want to live in retirement, how much that is going to cost and how long you are likely to be retired for, you should have an estimate of how much you will need to live comfortably in retirement. By deducting any income you will receive from the State Pension, you will be left with the ideal value of your personal or workplace pension when you reach retirement.
From here you can work backwards by figuring out how many years you have until you retire and splitting the difference of your current pension value and your ideal retirement value. This will determine how much you should be paying in now. Remember, that your employer pays in too and you will also receive extra funds from tax relief.
And of course, it’s important to consider what is affordable for you right now. If paying in too much now is going to leave you short in your day-to-day life, then you may need to go back and reconsider the amount you want in your savings when you reach retirement.
There are other ways to boost your pension savings too…
For further help, or to find other ways to boost your pension savings, a regulated financial adviser can help. We can help you improve the performance of your pension so that any contributions you make have the potential to grow even more than they currently are, leaving you with more money for when you retire.