The amount you can save on a pension ultimately depends on what you can afford, but the longer you leave it, the more you need to save.
Research shows regularly that we set ambitious goals for our expected retirement income and then underestimate how much we need to set aside to achieve it.
So, how much should I save?
We take a look at what you would like to retire and how to get there.
How much do you need to save for your retirement? We take a look at what you need to consider
First … a quick pension guide
There are two main types of pension plans that you find through work, defined contribution and defined benefit, and the latter is often referred to as final salary plans.
The fundamental difference is that, with a defined benefit scheme, your employer is committed to delivering an income to you in retirement and is responsible for doing so.
It is very likely that you will also have to contribute each month, setting the amount required by your employer.
On the other hand, if you have a defined contribution scheme, save on this and also get contributions from your employer. The money is invested to build a well, which will then finance your retirement.
With a defined benefit pension, the simple answer to how much to save is simple: enter everything your employer requests to obtain the pension it promises.
With a defined contribution scheme, the answer is more complicated, since the responsibility lies in delivering the money you need for retirement, so the more you save, the more money you will get.
When you reach retirement, you can keep your pension invested and withdraw money as income, or buy a regular income until you die in the form of a financial product called an annuity.
If you save on a personal pension, this will be a defined contribution plan. You pay money, invest it and build a pot.
How much do you need in retirement?
There are a couple of essential things to keep in mind when thinking about how much you would need in your retirement.
The first is that your expenses are likely to be lower. A general rule used in the financial industry is that a 40-year-old would need approximately 50 percent of his current income to have the same standard of living in retirement.
This works on the basis that by the time they retire they will be free of mortgages, they will not support the children and they will no longer spend as much on things as moving and other costs involved in going to work every day.
The second thing to consider is the state pension. Under the new flat rate state pension plan, this is £ 155.65 per week, which is £ 8,094 per year.
By allowing a full state pension, someone with a retirement income of £ 23,000 would need another pension income of about £ 16,000.
The pension fund needed to deliver that income based on taking 4 percent of the income from funds that remained invested in retirement would be £ 400,000.
Legal & General has an annuity calculator that shows the amount of income you can expect from a pension fund with an annuity.
How much should I save?
Obviously, the amount you need to save each month depends on how big the pension you want is.
But it also depends on your age.
For example, you can get a decent level of retirement income if you start turning 20, paying 12 percent of your salary, but if you leave until you are over 40, you may have to pay about 20 percent. . cent to get the same level of retirement income.
Jamie Jenkins, pension expert at Standard Life, says: "While 15 percent is a good goal to target, many people will start paying less than this and increase their contributions gradually."
The good news is that the money that goes into your pension does not just depend on you. Your employer will also contribute and many offer more generous contributions than the minimum that self-enrollment pensions specify.
You also get relief from income tax on your contributions in a pension plan, which means that you actually save from non-taxable income.
There are some general rules to determine what percentage of your salary you should receive a pension, in terms of your contributions and those of your employer.
The most common is half his age since he started saving, so if he starts at age 30, it could be 15%, while if he starts at age 40, it is 20%.
The wealth of pension calculators can provide a more accurate view. Many allow you to enter your age, salary, required pension income and any current pension contribution or pension. Then you can play with the numbers.
Calculators to help you calculate your savings pension.
The pension calculator below with Fidelity technology allows you to enter your details and calculate how much you could have in terms of a total boat and future income, and compare them with what you expect.
Investment returns are calculated using the investment specialist's projections and show what can be expected with respect to average market performance and poor market performance (it is worth noting that you can be lucky and get above-average performance) .
The projections of future income are adjusted to inflation, which allows you to make a direct comparison between your current income and potential future income expressed in current terms.
Here are links to some of the best we have found:
> Aviva pension calculator
(Shows the potential pot and compares the reduction and the annuity)
> Pension Advice Money Advice Service
(It works in your personal scenario)
> Standard life pension calculator
(Fast and simple to use)
The key is to look at what your projected income will be when you reach retirement and then try to calculate if this will be appropriate.
However, be careful, it can be confusing and demoralizing to find out how your savings today will translate into income when you retire.
The reality is that when you start saving for retirement, you may not be able to pay for everything you want. However, it is important to remember that payments can be increased at any time and the sooner you start, the more likely you are to build a bigger boat.
HOW MUCH CAN I DELIVER 15% OF THE SALARY?
Aviva's pension calculator suggests that a 35-year-old person with £ 35,000 who saved 10 percent of his salary with his employer by adding 5 percent for the rest of his career, would accumulate a well of £ 283,000 for his 68-year state pension age.
It is predicted that they will obtain a state pension of approximately £ 8,000.
If they used the income reduction for retirement, they could have an income of £ 21,000 per year from 68 to 94 years, when their pension would run out. After this, your income would be reduced to the state pension.
Alternatively, an annuity would deliver an income of £ 16,915 for the rest of his life.
Investing for retirement does not have to be a pension
It makes sense to take full advantage of any offer to match the contributions your employer makes.
For example, if you match up to 5 percent of what you enter, then putting that maximum of 5 percent means you can make the most of your employer's scheme.
Above this level, you will continue to benefit from the tax relief of contributions, but you will not gain any additional impetus from your work plan.
That means that because of the restrictions surrounding pension savings, mainly because you can not access them until at least 55 years, some people choose to invest additional sums in other places.
So, for example, you could put an extra 5 percent of your salary in an Isa investment, where you do not get any tax reduction on contributions, but any income you get from it should be tax free.
How to balance a pension with other investments, like an Isa, is reduced to personal choice.
Top of the stack: the sooner you start saving for retirement, the better.
The essentials of the pension: what you need to know
Defined contribution vs defined benefit
There are two main types of pension plans: defined contribution and defined benefit plans (also known as final salary).
A defined-contribution pension will generally allow members to decide how much of their salary they want to pay and these payments will be matched by their employers, at least up to a certain level.
The money is saved in a pension and then invested in funds with the perspective that it will grow over the years to deliver a retirement boat.
You can track investments, measure performance and modify them if you wish.
However, it is up to you to accumulate the pot needed for your retirement, so it is important to keep the payments once you start and re-evaluate how much you can pay in each few years.
With a defined benefit pension plan, your employer will generally pay a certain amount of your final salary when you retire and they will be responsible for financing it.
There are other types of defined benefit schemes, such as career-adjusted schemes in which you will be paid a proportion of your average income during your employment.
Different pension providers will execute plans in different ways, so it's worth consulting with your provider to get all the details.
However, defined benefit pension plans have proved very costly for companies and, as a result, have become rare in private companies and, in general, are only offered in the public sector.
Most people who have a few years to work will be dependent on a defined contribution pension for a good portion of their retirement income.
Types of work pensions
Defined contribution pension
A worker agrees to pay a fixed amount in his defined contribution pension plan, that is, 5 percent of his earnings.
Your employer can match this, so that 10% of your total income goes to the pension each month (5% + 5%).
The money is invested in funds of the stock market and the jackpot grows over the years. When retiring, the saver should take his boat and buy an income with him or use it to obtain one.
Defined benefits pension.
A worker agrees to pay a certain amount per month in his final salary, that is, 8 percent of his earnings.
In return, your employer will pay you a fixed part of your final salary for each year you worked there, in this case a sixtieth.
A person who has worked in the company and has been a member of a pension plan for 40 years, therefore, would retire with two thirds of his final salary (40/60).
What is the pension self-registration?
Many people have been paying a pension with work for many years, but not all companies had plans and this means that millions were losing retirement savings
As a result, the government commissioned the Pension Regulator to ensure that employers implement a scheme that is considered vital to ensure that people have more retirement income to complete state pension payments.
The rules mean that if you are an employee, then your employer must offer you a pension plan.
These rules if you are at least 22 years old and are employed with a salary of at least £ 10,000 per year.
You have the option to say "no" to automatic enrollment if you do not want to join, but if you do not do anything, you will automatically register.
By 2018, all employers by law must contribute to the pensions of their employees, but to begin with, only the largest companies had to offer this.
According to government figures, more than 5 million people have registered automatically since its inception in October 2012, and less than 1 in 10 have opted to be excluded.
The law says that a minimum percentage of your "qualified earnings" must be paid into your work plan, this means that the amount you earn before taxes between £ 5,824 and £ 42,385 a year, or your full salary or pre-tax salary. It depends on how your employer chooses to calculate the qualified earnings.
At this time, minimum rates are low, with approximately 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 by 2018.
In practice, the minimum amounts may be greater for you or your employer, due to the rules of the individual schemes.
|The minimum you pay||The minimum your employer pays||The government pays|
|0.8% of your qualified earnings & # 39; rising to 4% by 2018||1% of your qualified earnings; Going up to 3% in 2018||0.2% of your & # 39; qualified earnings & # 39; rising to 1% by 2018|
Tax relief on contributions to your pension
Tax relief on contributions to your pension funds means that part of the money that would have been spent as income tax will go to your pension.
If you pay money in a pension yourself or your employer takes it from your salary, you will automatically get a 20 percent tax deduction.
For example, you are a lower rate taxpayer and place £ 80 of your tax salary on your pension. He would have earned £ 100 before applying the income tax, so he would get a tax deduction of £ 20.
It becomes a little more complicated if you are a taxpayer with a 40 percent higher interest rate, since you can claim relief at the additional 20 percent, but you may have to do it yourself, while the taxpayers of the Best rate can claim up to 45. Percentage tax rate.
The way in which taxpayers with higher rates get their tax relief depends on their pension plan. Some will do it automatically, others will have to write to the HMRC or claim it through the self-assessment. Ask your employer what you need to do.
Tax relief on pensions is limited. You are limited to 100% of your earnings in a year, or by the annual allocation of £ 40,000 per year. A lifetime subsidy of 1 million pounds sterling is also applied to the size of a pension, which includes the money you pay and what grows as well, so it is no longer profitable to save on a pension.
If you are self-employed or want to increase your pension, you can establish your own personal pension in addition to, or instead of, your work pension and invest through it.
You can choose a simple pension for the interested parties or a personal pension with a more flexible own investment, known as Sipp.
You also get a reduction in taxes on your personal contributions to the pension, as explained above.
Do not forget the state pension.
In addition to your labor or personal pension, those with enough qualifying years of National Insurance payments will receive a basic state pension payment provided by the Government, which is now £ 155.65 per week for a single person under the new flat rate system.
The state's retirement age should be increased in the next few years, you can use the HMRC state pension calculator to see when you will be eligible for it.
For a person 35 years of age, the retirement age of the state will be 68 years.
Although it may not seem like a large amount, it is a good foundation on which to build your retirement income.
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