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How to calculate pension contributions

The big question you face when setting up a pension is working out how much savings you'll have when you come to retire.

In this short guide, we'll explain how to calculate your pension contributions for the future.

Knowing how much you should be saving is tricky. It’s hard to imagine what you might need in retirement and even harder to predict what might happen in your life before then.

There are a few things you can do to take stock of your situation and make a plan for the future. It’s a good idea to have a think about the standard of living you want to maintain when you start to reduce or stop working.

Check your State Pension entitlement

A key source of income in later life is the State pension. The amount you receive varies by your National Insurance record.

While the State pension won't be enough to support a comfortable retirement on its own, it's worth knowing how much you'll receive to fund your retirement.

You can use the free government State pension service to check your National Insurance contribution history and see:

  • if you’re eligible
  • how much you’ll get
  • when you can take your State pension

Calculate your own pension contributions

Next, look at the pension or other savings you’ve put aside for retirement. You can get up-to-date pension statements from your workplace or private pension providers. 

You can add this information (including details of any contributions you’re currently paying) into our pension calculator to predict what savings you will have in retirement and what kind of income this will provide.

You can adjust the contributions to see how this impacts the savings you’ll have at your preferred retirement age. You can also see if delaying your retirement helps.

Pension limits

In theory, you can pay as much as you want into your pension, but there are limits to consider making sure you’re being as tax efficient as possible.

Annual allowance

You can get a tax boost on your savings up to £40,000 each year or the annual earnings, whichever is lower. If you put away over this limit, then you may face a tax charge. 

Lifetime allowance

You can save £1,073,000 on pension savings during your lifetime. If you save more than this then you may pay a hefty tax bill on any amount you withdraw over this limit.

For more on pension tax limits, check out our guide on how much you can pay into your pension.

When to start saving

With pensions, the earlier you start saving, the better.

Starting early, even if it’s a smaller amount than you would like, means you’re taking advantage of the tax benefits that you’re entitled to and giving your savings a chance to grow over time. You can also roll over any unused allowance from the last three years, so if you have a pension in place you could always put away more money later on. 

If you’re saving into a pension for the first time, then you might be able to use a rough rule of thumb where you take your current age, divide it in half and pay that amount as a percentage of your income each year.

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