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How much should I pay into my pension?

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If you’ve started a pension, you’ve already made a positive step towards saving for a brighter future. But how much money should you be paying into it if you want a comfortable retirement?

Is £100 a month enough? More? Less?

We’ve put together a few pointers to help you decide.

How big an income will you need?

First things first, it’s worth considering how much you’ll actually need to live on when you finish working. Because that directly affects how much you need to save.

It can be hard trying to imagine what your life will be like years in the future. But thankfully, the government has come up with some figures showing roughly what percentage of your income you’d need to enjoy your current standard of living when you retire. So there’s no need to stick a finger in the air and guess.

Percentage of your pre-retirement income needed in retirement:1

if you earn
£12,200-£22,400

if you earn
£22,400-£32,000

if you earn
£32,000-£51,300

if you earn
over £51,300

The reason these figures are less than current earnings is that many of our everyday expenses won’t apply any more when we retire. For example, you won’t be commuting to work, you’re unlikely to have childcare costs, and with any luck you’ll have paid off your mortgage, too.

So if you earn the average UK salary of around £24,5002, for example, the guidelines suggest you’d need around 67% of that for a comfortable retirement. That works out as about £16,500 a year. Of course, your living costs may be more or less than the guidelines suggest, depending on your lifestyle.

We’re all different, after all.

So how much might you need to save?

In truth, the answer to this depends largely on how soon you start. The earlier you begin saving, the less you’ll have to put away as a proportion of your income each month – and vice versa.

However, to give you a basic idea, the graphic below shows approximately how much a 22-year-old earning the average UK salary of £24,500 might need to save for a retirement income of £16,500 when they reached 68. That’s the 67% of salary government guidelines suggest they’d need to maintain their current lifestyle.

How much might a 22-year-old need to save for a £16,500 income?

if their pension grew at a ‘low’ rate (2% a year)

if their pension grew at a ‘medium’ rate (5% a year)

if their pension grew at a ‘high’ rate (8% a year)

These figures take inflation and charges into account, of 2.5% and 0.75% a year respectively, and are based on a number of assumptions (see below). The monthly savings required would also need to rise in line with inflation. And don’t forget – if you’re in a workplace pension, your employer may contribute as well, helping you to save.

Because there are lots of variables involved, we’ve had to make quite a few assumptions to come up with these figures. As well as those mentioned above, we also assumed: the individual would use their pension pot to buy an single life annuity, with no dependent benefits; this annuity would be £3,846 per £100,000 if their pension grew at 2% a year; £5,018 per £100,000 if it grew at 5% a year; and £6,317 per £100,000 if it grew at 8% a year; the individual would receive the full State Pension when they reached 68, and that it will rise in line with inflation at 2.5% a year; they wouldn’t take any tax-free cash as a lump sum; and they would receive basic rate tax relief of 20% on their pension contributions.

Please note that annuity rates change over time, and can vary considerably from provider to provider. Whether or not you’d receive the full State Pension will depend on pension rules when you reach State Pension age and your individual circumstances.  

The value of your pension investment is not guaranteed and can go down as well as up and you could get back less than has been paid in.

Get a personalised answer

The figures above are designed to help you start thinking about how much to pay into your pension. But they’re just a basic example based on one person’s circumstances – which are unlikely to match your own.

If you’d like a more accurate idea of what you ought to be putting away, there are online calculators that can help you do this – such as our own My Retirement Planner tool. Alternatively, you may want to speak to a financial adviser. Find a financial adviser near you at unbiased.co.uk 

Use our handy calculator

Would you like a more accurate idea of how much you should be saving for your retirement? Use our Retirement Planner tool. 

Open My Retirement Planner

Additional sources

[1] Department for Work and Pensions, ‘Framework for the analysis of future pension incomes: September 2013’
[2] Office of National Statistics, ‘UK Labour Market: July 2016’

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