The amount that you can save in a pension ultimately depends on what you can afford – but the longer you leave it, the more you will have to save.
Research regularly shows that we set ambitious goals on our expected retirement income and then underestimate how much we will have to reserve to achieve that.
So how much should you save?
We look at what you may want to retire and how you should get there.
How much should you save for your pension? We look at what you should consider
First … a short guide about pensions
There are two main types of pension plans that you come across through work, available premiums and defined benefit payments – the latter often being referred to as final pay plans.
The crucial difference is that with a defined benefit plan your employer promises to provide you with an income after retirement and is responsible for it.
You will probably also have to make a contribution every month, by entering the required amount that your employer states.
On the other hand, if you have a defined contribution plan, you save in this and you also receive contributions from your employer. The money is invested to build up a pot, which then finances your pension.
With a pension based on fixed commitments, the simple answer to how much to save is simple: place it as much as your employer asks for the pension that it promises.
With a defined contribution plan, the answer is more complicated because the job is to deliver the money you need when you retire – so the more you save, the more you get.
When you retire, you can invest your pension and withdraw money as income, or buy a fixed income until you die in the form of a financial product called an annuity.
If you save a personal pension, this is a plan with a fixed contribution. You pay money, invest it and build a pot.
How much do you need during your retirement?
There are a few essential things to take into account when thinking about how much you would need during your retirement.
The first is that your expenses are probably lower. A general rule in the financial sector is that a 40 year old person needs about 50 percent of his current income to have the same standard of living after retirement.
This is based on the fact that by the time they retire, they are mortgage-free, do not support children and no longer spend as much on things as commuting and other costs that are associated with work on a daily basis.
The second thing to consider is the state pension. Under the new flat-rate state pension scheme, this is £ 155.65 per week, which is £ 8,094 per year.
Allowing a full state pension, someone seeking a retirement income of £ 23,000, would require a different retirement income of around £ 16,000.
The pension pot that was needed to deliver that income based on 4 percent income from funds that remained invested would be £ 400,000.
Legal & General has an annuity calculator that shows how much income you can expect from a pension with an annuity.
How much should you save?
It is clear that the amount that you must save each month depends on how large your pension is that you want.
But it also depends on your age.
For example, you can get a decent retirement income if you start paying in 12 percent of your salary in your twenties, but if you leave it until you are older than 40, you may have to pay closer to 20 cents to get the same level of retirement income .
Jamie Jenkins, pension specialist at Standard Life, says: & # 39; Although 15 percent is a good target to strive for, many people will start paying less and gradually increasing their contributions. & # 39;
The good news is that the money that goes to your retirement does not rely solely on you. Your employer will also contribute and many offer more generous contributions than the absolute minimum set by automatic registration pensions.
You also receive a tax deduction for your contributions to a pension scheme, which means that you can effectively save on unpaid income.
There are some general rules of thumb for working out what percentage of your salary a pension must take in terms of your and your employer's contributions.
The most common is half your age from the time you started saving – so if you start at the age of 30, it could be 15 percent, while when you start at 40 it's 20 percent.
A more accurate picture can be provided by the wealth of pension calculators that we have there. Many allow you to enter your age, salary, required retirement income and any current pension contributions or pots. You can then play with the numbers.
Calculators to help you work out your retirement savings
With the pension calculator below, powered by Fidelity, you can enter your data and calculate how much you would have in terms of total pot and future income – and compare that with what you hope for.
Investment returns are calculated using projections from the investment specialist and show what you would expect under average market performance and poor market performance (it is worth noting that you can be lucky and achieve above-average performance).
Forecasts for the future are adjusted for inflation so that you can make a direct comparison between your current income and your potential future income expressed in the current conditions.
Here are links to some of the best we have found:
> Aviva pension calculator
(Shows potential pot and compares intake and annuity)
> Money Advice Service pension calculator
(Works on your personal scenario)
> Standard Life pension calculator
(Fast and easy to use)
The most important thing is to look at what your expected income will be when you retire and then try to find out if this is sufficient.
Be warned though, it can be confusing and demoralizing to find out how your savings will translate today into income when you retire.
The reality is that when you start saving for your retirement, you may not be able to pay as much as you would like. However, it is important to remember that payments can be increased at any time and the sooner you start, the greater the chance that you will build a larger pot.
HOW MUCH WOULD 15% OF SALARY DELIVER?
Aviva & # 39; s retirement calculator suggests a 35-year-old who is currently at £ 35,000 who has saved 10 percent of their salary, while their employer built up a £ 283,000 pot for the remainder of their career due to their state pension age of 68 years. .
They predict a state pension of around £ 8,000.
If they used the inclusion of income for their retirement, they could have an income of £ 21,000 a year from 68 to 94 years, should their retirement pot run out. After this, their income would fall to the state pension.
Alternatively, an annuity would provide an income of £ 16,915 for the rest of their lives.
Investing for retirement does not have to be a pension
It makes sense to get the maximum benefit from each offer to match your employer's contributions.
For example, if they match a maximum of 5 percent of what you surrender, setting that maximum 5 percent means that you get the most out of your employer's plan.
Above this level you still enjoy tax relief on contributions but you will not receive an extra boost from your work schedule.
That means that due to the restrictions on retirement savings – mainly that you can't use them for at least 55 years – some people choose to invest extra sums elsewhere.
For example, you can invest an extra 5 percent of your salary in an Isa investment, where you will not receive a tax reduction on contributions, but all income that you ultimately withdraw from it must be tax-free.
How to balance a pension with other investments such as an Isa comes down to personal choice.
Top of the pile: the sooner you start saving for your pension, the better.
Retirement benefits – the things you need to know
Defined contribution versus defined benefit
There are two main types of pension plans: defined contribution plans and defined benefit plans (also known as final pay).
A pension based on promised contributions usually allows members to decide how much of their salary they want to pay and these payments will be compared by their employers, at least up to a certain level.
The money is saved in a pension and then invested in funds with the intention that it will grow over the years to deliver a pension pot.
You are able to follow the investments, measure how they perform and change them if you want.
However, it is up to you to build the pot that you need for your retirement, so it is important to keep track of payments as soon as you start and reassess how much you can afford to pay every few years.
With a defined benefit plan, your employer usually pays a certain amount of your final salary when you retire and they will take responsibility for financing it.
There are other types of defined benefit plans, such as career-adjusted plans where you receive part of your average income during your employment.
Different pension providers will implement schemes in different ways, so it is worth checking with your provider for the full details.
Planned defined benefit plans have, however, proved very expensive for companies and as a result have become rare in private companies and are usually only offered in the public sector.
Most people with a number of years left to work will depend on a fixed-premium pension for a good part of their retirement income.
Types of work retirement
Defined contribution plan
An employee agrees to deposit a certain amount in their defined contribution plan, say 5 percent of their income.
Their employer can match this, so 10 percent of their total income goes to retirement every month (5% + 5%).
The money is invested in equity funds and the pot is growing over the years. Upon retirement, the saver must take their pot and buy an income with it or attract one for themselves.
An employee agrees to pay a certain amount per month for their last wage pension, say 8 percent of their income.
In return, their employer pays them a fixed part of their final salary for each year that they have worked there, in this case a 60th.
Someone who has worked for the company and had been a member of the pension scheme for 40 years should therefore stop two thirds of his final salary (40/60).
What is the automatic registration of pensions about?
Many people have been paying a pension with work for many years, but not all companies have schemes and this means that millions of savings are missing for retirement
As a result, the government has instructed the Pensions Regulator to ensure that employers roll out a plan that is considered crucial to ensure that people have more retirement income to replenish payments to state pensions.
The rules mean that if you are an employee, your employer must offer you a pension plan.
These rules apply if you are at least 22 years old and have a salary of at least £ 10,000 per year.
You can & # 39; no & # 39; say to automatic registration if you do not want to participate, but if you do nothing, you will be automatically notified.
By 2018, all employers will be required by law to contribute to their employees' pensions, but to begin with, only larger companies must offer this.
More than 5 million people have been automatically registered since the start in October 2012, and fewer than 1 in 10 have chosen to opt out, according to government figures.
The law says that a minimum percentage of your & # 39; eligible income & # 39; must be paid into your employer's scheme, which means either the amount you earn before tax between £ 5,824 and £ 42,385 per year, or your entire salary or wage before tax. It depends on how your employer chooses to calculate qualifying income.
At the moment the minimum rates are low, with about 1 percent of your salary and 1 percent of your employer. That will increase to 4 percent of you and 3 percent of your employer in 2018.
In practice, minimum amounts for you or your employer may be higher due to individual schemes.
|The minimum that you pay||The minimum that your employer pays||The government pays|
|0.8% of your & # 39; eligible income & # 39; increase to 4% in 2018||1% of your & # 39; eligible income; rises to 3% by 2018||0.2% of your & # 39; eligible income & # 39; to 1% in 2018|
Tax reduction on contributions to your pension pot
Tax relief on contributions to your pension pots means that part of the money that would have gone as income tax goes to your pension instead.
If you yourself pay money or a pension from your employer from your wage, you automatically receive a 20 percent tax reduction.
For example, you are a taxpayer with a lower rate and you pay £ 80 of your tax money to your pension. You would have earned £ 100 before the income tax was applied, so you would get a £ 20 tax reduction.
It becomes a little more complicated if you are a 40 percent taxpayer because you can claim extra tax for the extra 20 percent – but you may have to do this yourself – while top-level taxpayers can back up up to 45 percent . percent tax rate.
How taxpayers with higher rates get their tax reduction depends on their pension scheme. Some will have it done automatically for them, others have to write HMRC or reclaim it through self-evaluation. Ask your employer what you should do.
Tax reduction on pensions is limited. It is capped at 100 percent of your income in a year, or with the annual contribution of £ 40,000 a year. A lifelong deduction of £ 1 million on the size of a pension pot also applies, including the money you pay and whatever it earns, above that it is no longer tax efficient to save a pension.
If you are self-employed or would like to increase your pension pot, then you can – or instead of – your work pension build up your own pension and also invest in it.
You can opt for a simple stakeholder pension or a more flexible, self-invested personal pension called a Sipp.
You will also receive a tax reduction on your personal pension pot contributions, as explained above.
Don't forget the state pension
In addition to your work or personal pension, those with sufficient qualifying years of national insurance payments will receive a basic state pension allowance that is provided by the government – which is now £ 155.65 per week for a single person in the new fixed-income system.
The state pension age must be raised in the coming years, you can use the HMRC calculator for state pensions to see when you are eligible.
For a 35-year-old today, the state pension age is 68.
Although it may not seem like a large amount, it is a good basis to build up your retirement income.
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