How much should you pay into your pension?

Make sure you save enough for retirement

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?

Here are some ideas to help you plan for the future.

How much income will you need when you retire?

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.

On current estimates, the government has issued the following figures as a guide to how much of your current income you'll need to receive in retirement to help maintain your current standard of living:

  • 70% of your current income if it’s between £12,200 and £22,400
  • 67% of your current income if it’s between £22,400 and £32,000
  • 60% of your current income if it’s between £32,000 and £51,300
  • 50% of your current income if it’s over £51,300

The reason the amounts for retirement are less than your current earnings is that many of your everyday expenses won’t apply any more when you 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 £30,472 per year 1, the guidelines suggest you’d need around 67% of that for a comfortable retirement. That works out as about £20,000 a year. Of course, your living costs may be more or less than the guidelines suggest, depending on your lifestyle. The Pensions and Lifetime Savings Association launched their ‘Retirement Living Standards’ in 2019 which give a broad indication of what could be needed for a minimum, moderate or comfortable life in retirement. To see their standards and get an idea of living costs for each lifestyle, visit https://www.retirementlivingstandards.org.uk/

So how much might you need to save?

In April 2019 the minimum contributions to auto-enrolment workplace pensions were raised to 8% of earnings, including what the employer puts in and tax relief from the government. But we think even this is unlikely to give people the pension pot they’d need for a comfortable retirement.

To help close the gap, we’re calling on the government to increase the minimum to 12.5% by 2028. 

Your personal situation

12.5% of earnings is our general recommendation, but the actual amount you’ll need to save depends on your own situation. For example:

  • When you start: The earlier you start, the less you'll need to save each month.
  • Existing retirement savings: If you’ve already got some pension savings you may not have to have to save as much someone who’s yet to start.
  • Your State Pension entitlement: The new State Pension currently pays a maximum amount of £179.60 a week for 2021/22 to people with 35 years’ worth of National Insurance contributions or credits.
  • The income and lifestyle you want in retirement: Clearly, the higher your desired income, the more you’ll need to save.
  • When you plan to retire: The earlier you plan to stop working, the more you need to save. And the later you plan to stop, the less you’re likely to need.
  • How much risk you’re prepared to take: In general, people who take more investment risk can expect higher returns on their savings, so they may be able to get away with saving a bit less. But higher-risk investments don’t always lead to higher returns, and a fall in the value of your pot close to retirement may force you to save a lot more, work for longer or leave you short. 

What’s your magic number?

The easiest way to get a good idea of what you should actually be saving is to carry out some scenario planning of your own. In a few easy steps our retirement planner tool lets you:

  • Get an idea of your likely income in retirement
  • See how to use a flexible income (drawdown), a guaranteed income (annuity), or withdraw your pension(s) as cash
  • Adjust the amount depending on retirement age and amount paid into your pension

Before you use an online planner like this, it makes sense to gather details of all your existing pensions and get an up-to-date State Pension forecast.

Get to grips with the pension basics

Find out more about the key things you need to know on your retirement journey.