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Find out moreWritten by Retirement Line
If you haven’t retired yet, how much you save into your pension scheme now can determine the quality of life you enjoy later. We look at factors to consider when reviewing your level of pension contributions.
With so many options and rules around pensions, it can sometimes be difficult to know how much you should be putting away. Here’s a breakdown of the key factors to consider, with insights from experts in the field.
Please note: in line with our editorial policy, this article is for information purposes only and does not constitute financial advice. Please seek further information, guidance or advice in respect of your own circumstances.
In the UK, employees nowadays typically pay into a defined contribution (DC) pension scheme, where both you and your employer make regular payments into your pension pot. Since automatic enrolment was introduced in 2012, an extra 10 million employees now pay into this type of workplace pension scheme.
Employers are legally required to contribute at least 3% of your qualifying earnings, with employees contributing at least 5%, totalling 8% between you. Some employers are more generous, so it’s worth checking if you can increase your contributions and whether your employer will match it.
Another pension type that nowadays is less common is a defined benefit (DB) pension scheme. This offers a guaranteed pension income, typically based on your years of service and your final or career average salary. Your employer contributes to the scheme throughout your employment. Some schemes require you to make contributions to the scheme too.
When it comes to deciding how much you should pay into your pension, there isn’t a one-size-fits-all answer. You need to consider several factors, such as how much you've already saved, your planned retirement age, your employer’s contributions, and the growth of your investments.
Martin Lewis, the founder of MoneySavingExpert, recommends at least considering the "50% rule". This is where you contribute half your age as a percentage of your salary.
He says: "As a very rough rule of thumb, take the age when you start putting money in your pension, halve it, and that's the percentage of your salary to aim to put into your pension for the rest of your working life for a strong pension income.
“So start at 20 and it's 10% (this includes employer's contributions), at 40 it's 20%. Don't worry, almost nobody does it! The real takeaway is how the earlier you start, the better, as you've longer for the gains to compound. And every time you get a pay rise, if possible put a chunk of that into your pension before you get used to the increase.”
When deciding how much to contribute, think about several factors:
How much have you already saved?
How many working years do you have left until you retire?
Will you increase or decrease your contributions in the future?
How much do you expect your investments to grow?
Will your employer match your contributions?
One question pension experts get asked a lot is “how much should I pay into my pension each month?”. We’ve gathered some of their responses below:
In a podcast shared to the MoneySavingExpert website, Martin Lewis discusses his 50% age rule further. He said: “You're 30, you halve it… 15. So, the equation says that you want to put 15% of your income – and that includes employer contribution – into your pension for the rest of your life to have a pretty strong retirement fund.”
Another expert, Tom Selby, director of public policy at AJ Bell, spoke to the Independent in 2023 for their article “Would your savings survive a 100-year life?”. In it, he says: “The best way to ensure a comfortable retirement is to start saving early and often. To save the £447,000 required for an average salary in retirement from age 65 to 100, a 25-year-old would need to save £235 a month.
Delaying by 10 years to start saving at age 35 sees the monthly saving figure almost double to £428 and if you wait until age 45 it is a whopping £859 a month.”
Steve Webb, former Pensions Minister says: "It used to be said that the percentage of your pay you save should be half of the age at which you start, but this isn’t true if you save late, so there’s no right answer. It depends what your target is and how much you have already saved – but 12-15 per cent, for most people, is the space you want to be in, and that includes the employer contribution. However, this is premised on starting in your 20s and not having a mortgage in retirement.”
To give you an idea of target pension pot sizes, the Pensions and Lifetime Savings Association (PLSA) report annually on how much income a retiree might need to achieve. According to their Retirement Living Standards, to achieve a minimum retirement an individual will need £14,400 a year. For a moderate retirement, you will need £31,300 per year, and for a comfortable retirement, you'll need £43,100 annually.
The above figures offer a target to aim for and don’t include housing costs. But remember that your individual needs may vary, so you may require a higher – or lower – income yourself. In addition, remember that the full new State Pension currently covers the first £11,500 of retirement income.
If you're self-employed, there’s no employer to contribute on your behalf, so you’ll need to be proactive about setting up your own pension scheme, like a personal pension or a self-invested personal pension (SIPP).
According to research by the Institute for Fiscal Studies in 2023, fewer than one-in-five self-employed workers are saving in a pension.
When deciding how much to contribute, think about your income variability, as you’ll also need to ensure you have sufficient savings to tide you through the quieter periods. In a good year, consider increasing your pension contributions.
If you start saving later in life, you may need to contribute more to make up for lost time. Additionally, review your pension regularly to ensure you’re on track to meet your retirement goals.
To maintain a good standard of living in retirement, you may wish to follow Martin Lewis’ guidance to contribute half your age as a percentage of your annual salary. The earlier you start, the less pressure you’ll face later, as compound interest will grow your savings over time.
The good news is that self-employed individuals saving into a pension scheme benefit from tax relief in the same way that employed people do. The government adds 20% to your contributions for basic-rate taxpayers. Higher and additional-rate taxpayers can claim further tax relief through Self-Assessment each year (see more below).
MoneySavingExpert offers further pension information for the self-employed.
Remember, if you’re a basic-rate taxpayer, the government adds 20% to your pension contributions. This is known as ‘tax relief’. It’s a great incentive for saving for the future as every contribution you make gets a boost.
The government offers basic-rate taxpayers 20% tax relief on pension contributions, even if you’re a non-earner. For instance, if you contribute £800, the government tops it up by £200.
Higher-rate taxpayers can claim up to 40% relief, so a £10,000 contribution might only cost £6,000 after relief.
For additional-rate taxpayers, relief can go up to 45%.
However, to benefit from the full 40% or 45%, you must pay enough tax at these rates to qualify.
When talking about pensions and tax relief, it's important to note your pension contribution limit, or ‘annual allowance’.
Currently, you can typically pay up to £60,000 annually into your pension (2024/25 tax year) and still benefit from tax relief. Your annual allowance may be lower if you have taken money out of your pension pot, or have a high income.
Investing in a pension fund even for five years can potentially be worthwhile. Remember, your pension contributions will benefit from tax relief and may also experience investment growth, providing a boost to your savings. Additionally, if you’re employed, your employer's contributions can further increase the value of your pot.
Although five years isn’t a particularly long period, the sooner you start, the more your savings can grow. Every contribution helps secure additional income in retirement.
However, for some people there may be better options than paying into a pension for a short period. Please consider seeking help from a professional financial adviser if you need to explore all your options.
Although the term ‘pension savings’ is used, in some ways pensions and savings are not the same. For example:
Pensions are long-term retirement plans that benefit from tax relief and, in many cases, employer contributions. They are typically invested in funds that grow over time. Pensions also have restrictions on when you can access the money (typically from age 55, though this is increasing to 57 in 2028).
Savings, on the other hand, are more flexible, typically allowing you to access your money at any time. However, savings accounts don’t benefit from tax relief, and interest rates on savings may be lower than the potential long term return on pension contributions.
Once you've started contributing to a pension, the next step is to think about how to make that money grow over time. The earlier you start and the more you contribute, the greater the potential growth.
But contributions alone won’t make your pension grow — you’ll need to consider where your money is invested, and whether you can take steps to boost its value. Here are a few key strategies to consider:
Even small increases to your pension contributions can have a big impact over time. If you receive a pay rise, you may decide to put some of it into your pension each month. As Martin Lewis puts it, "If you're saving a monetary amount each month, say £100, make sure you increase it every time you get a pay rise so it's the same proportion of your salary.”
Additionally, if your employer offers to match contributions beyond the minimum, take full advantage of this. It’s essentially free money that can significantly boost your pension pot.
Most pension schemes allow you to choose how your money is invested. This can range from lower-risk, lower-reward investments such as bonds, to higher-risk, higher-reward investments like stocks.
If you’re just starting out and have several decades until retirement, you might want to consider a higher-risk investment strategy. The longer time frame means you have more opportunity to ride out the market’s ups and downs, and benefit from potential growth.
As you get closer to retirement, it may be wise to switch to more conservative investments to protect the money you've built up. Many pension schemes offer “lifestyling” options that automatically reduce risk as you approach retirement.
If you've worked for several employers over the years, it’s likely you have multiple pension pots. Consolidating these pensions into one might make them easier to manage and may even reduce fees. However, it’s important to check for exit fees and check you won’t lose any valuable benefits before making the switch. Read more in our article: When should you consolidate pension pots?
Fees can eat into your pension pot over time, so it’s important to keep an eye on how much you're being charged by your pension provider. Compare different providers, and weigh up whether to switch if you find one with lower fees and better investment options.
Tom Selby at AJ Bell wrote for the Times that even a small difference in fees could have a dramatic impact on your overall retirement savings.
“Someone contributing £2,000 a year into a pension and paying a fee of 1.5% could find they are £15,000 worse off after 30 years of saving than a person making identical contributions but paying a fee of 0.75%”, the article says.
Again, you will need to check whether you would lose out on any valuable benefits by transferring to a pension scheme with lower fees. Sometimes the value of these benefits will outweigh the potential savings on fees.
It’s easy to set up a pension and then forget about it, but staying engaged is key to making your pension grow. Annually reviewing your contributions, investment choices and pension provider will help ensure you’re making the most of your savings.
Regularly reviewing your pension also gives you the chance to maximise opportunities, such as increasing contributions when you receive a pay rise or bonus.
According to a Standard Life study in 2023, 32% of people have pension admin last on their to-do list, with 16% admitting they don’t know where to access their pension information.
If you have lost track of any pension schemes to which you belong, use the GOV.UK free pension tracing service to get back in touch with the schemes..
While investing in a pension scheme is typically a tax-efficient way to save for retirement, it’s not the only option. You may wish to diversify your retirement savings beyond pension schemes, such as:.
Investments in ISAs, stocks, bonds etc. can provide an additional income stream during retirement.
Buy-to-let property is another option, offering rental income as well as potential capital growth. However, property comes with risks, including maintenance costs and changes in the housing market. If you're considering relying less on your pension because of other investments, it’s essential to balance risk and return, given the generous tax relief available. Consider accessing professional financial advice to help you decide what’s best for you.
If you're considering relying less on your pension because of other investments, it's essential to balance risk and return, given the generous tax relief available. Consider accessing professional financial advice to help you decide what's best for you.
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