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How much should I pay into my pension?

Kyle Chubb
Wednesday 8th September, 2021

When it comes to pensions, one of the most popular questions we're asked is seemingly a simple one: How much should I be saving?

The answer, however, is a little more complicated.

In this article, we'll look at everything you need to know about how much money you should be saving into your pension.

How much pension do I need?

The truth is how much you should pay into your pension depends. Here are the 4 things you'll need to think about:

  1. When do you want to retire?
  2. What savings do you have right now?
  3. How much money would you like each year in retirement?
  4. How much can you afford?

Let's break it all down.

1. When do you want to retire?

When you're saving for the future, the first thing you'll want to think about is the end date. When do you want to stop saving and access your pension pot?

It goes without saying that the earlier you stop working, the longer your pension will have to support you.

Some people are very interested in retiring early, pumping as much as they can into their pension and sacrificing lots of flat whites along the way. Others are not so fussed, aiming for more of a work-life blend into their twilight years.

When you're ready to start withdrawing, your pension can be used in a number of ways. One of the common is by purchasing an annuity.

With an annuity, you use your pension pot to buy a fixed income from insurance company every year until you pass away. Obviously, the younger you are when you retire, the more an annuity is likely to cost.

Equally, if you want to do your own thing with the money, the younger you are when you retire, the longer it likely needs to last you. 

When you’re thinking about how much you want per year, you can also include the State pension. Currently, you'll need to wait until you're 65 to access this (rising to 67 in 2028).

It varies per person, but the average couple will receive around £15,000 a year. Again, if you’re planning on retiring around that time, the State pension will contribute to what you need. If you’re planning on early retirement, you’ll need to bridge that gap yourself. 

When you want to retire is a very personal choice that reflects your own unique circumstances. Have a think about when exactly you'd like to stop working , then factor that in when you decide how much you want to save.

2. What savings do you have right now?

Another important step in calculating your pension contributions is you current savings pots. Are you starting from zero, or have you already built up a pot?

The older you are and the less you have in savings, the more you'll need to add your pension today. This is because you have less time to save and take advantage of compound interest and growth of your pension pot. 

Take a look at the savings you have today. Do you already have a pension pot or two from previous employers? What about other savings accounts like a LISA or investments? Keep this in mind when thinking about your future pot - it's always better to not start from zero?

Not sure how to locate old pensions? Check out our guide on finding old pensions. Of course, you can also transfer your old pots into one, easy to manage place for free with Penfold.

How much should I pay into my pension

3. How much money would you like each year in retirement?

What does your dream retirement look like? Is it living it up on a sunny beach? Skiing holidays and classy meals out? Or is it as simple as leaving some money for the ones you love?

Everyone is different and the goals you have for life after work are as individual as you are. The important thing is to decide what's right for you. Then, you can work out how much you'll need.

A common concern is that you’ll need to match your current yearly income - but this often isn't the case. When you stop working, chances are you may not have to continue paying a mortgage or commuting costs.

However, bear in mind that retirement spending may not be consistent. While people tend to spend less on things like travel when they get older, they may need to spend more on healthcare.

A survey by Which? suggested that the average couple spends around £27,000 a year in retirement. Those who want a more luxurious retirement spending around £42,000, mainly on long haul trips abroad.

We asked some of the Penfold customers how much they think they'll need:

“I’m going for about £50,000 for my wife and I. I’d like to see all the places on my bucket list”

“£20,000. I like working, and I think I’ll be able and want to continue into retirement age. I’m also struggling at the moment to make higher contributions than that because I’ve just bought a house”

“I have no idea. I should use this pension calculator. I read a lot of things about finances but at the moment I just pay in what I can afford, which varies”.

Even if you don’t have a specific number in mind, try to at least envision the sort of life you're aiming for. That will give you a great way of working backwards and nailing down how much you should save.

4. How much should I put in my pension?

The final step - working out your magic number.

Some companies also go by a rough rule of thumb: to take your current age and halve it, and that’s the amount of your pre-tax salary as a percentage you should be saving. But in the world of freelance and self-employed workers, it’s not always that clear cut.

To help you plan our your retirement, we've built a nifty pension calculator. Simply enter:

  • the age you want to retire (step 1)
  • the pension pot you have now (step 2)
  • a rough estimate of the income you want in retirement (step 3)

Then, we’ll calculate how much you need to save to reach your goal.

Now, it’s worth bearing in mind that this is just a tool to help you work out what you need to be putting away to meet your individual goals. You'll also need to look at your other outgoings and budget to see how much you can afford to save. Like we mentioned, everyone is different.

Just follow the steps we've outlined here and sit back and relax, safe in the knowledge your future is one big step closer to being taken care of.

Capital at risk. Before transferring, please be aware of the risks involved.

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