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 targets for the expected retirement income and underestimate how much we will have to set aside to achieve this.
So how much would you have to save?
We look at what you might want to retire and how to get there.
How much do you have to save for your pension? We look at what you need to consider
First … a short guide about pensions
There are two main types of pension schemes that you encounter through work, defined contribution and defined benefit plans – the latter often being referred to as final pay plans.
The crucial difference is that your employer with a defined benefit plan promises to give you 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 gives up.
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 you can save is simple: you have to ask as much as your employer asks to get the pension that it promises.
With a defined contribution scheme, the answer is more complicated because it is the task to deliver the required money upon retirement – 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 up a pot.
How much do you need during your retirement?
There are a few essential things to keep in mind when considering how much you would need during your retirement.
The first is that your expenses are probably lower. A general rule used in the financial sector is that someone of 40 years old needs about 50 percent of their 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 spend less on things like commuting and other costs that are associated with work every day.
The second thing to consider is the AOW. 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 who wants a retirement income of £ 23,000, would need another retirement income of around £ 16,000.
The pension fund needed to deliver that income on the basis of a yield of 4 percent of funds invested in retirement 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 you have to 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% of your salary in the twenties, but if you leave it until you are over 40, you may have to pay closer to 20. to get the same level of retirement income.
Jamie Jenkins, pension expert at Standard Life, says: "Although 15 percent is a good target to target, many people will start paying less and gradually increase their contributions."
The good news is that the money that goes to your pension does not just depend on you. Your employer will also contribute and many provide more generous contributions than the absolute minimum set by automatic enrollment pensions.
You will also receive tax deductions for your contributions to a pension scheme, which means that you can effectively save on unpaid earnings.
There are some general rules of thumb for calculating what percentage of your salary a pension should be, 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 30 years of age, it can be 15 percent, while if you start at 40 it's 20 percent.
A more accurate picture can be delivered by the wealth of pension calculators that we have there. Many allow you to enter your age, salary, required pension income and any current pension contributions or pots. You can then play with the numbers.
Calculators to help you work out your pension 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 from the average market performance and poor market performance (it is worth noting that you can be lucky and achieve above-average performance).
Forecasts for future earnings are adjusted for inflation so that you can make a direct comparison between your current income and 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 admission 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 into income when you retire.
The reality is that when you start saving for your pension, you may not be able to pay as much as you would like. However, it is important to remember that payments can be raised at any time and the sooner you start, the greater the chance that you will build a bigger pot.
HOW MUCH WOULD YOU SELL 15% OF THE SALARY?
The Aviva pension calculator suggests that a 35-year-old saves 10 percent of their salary at £ 35,000, with their employer adding 5 percent for the remainder of their careers. He would build up a £ 283,000 pot on the basis of the AOW age of 68 years. .
They predict a state pension of about £ 8,000.
If they would use their income deduction for their retirement, they could have an income of £ 21,000 per year from 68 to 94 years when their pension pot would run out. Hereafter, 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 a pension 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 up to 5 percent of what you put into it, then handing in the maximum 5 percent means you get the most out of your employer's plan.
Above this level, you will still enjoy tax relief on contributions, but you will not get an extra boost from your work schedule.
This means that because of the restrictions on pension savings – in the first place that you can not use them for at least 55 years – some people choose to invest extra sums elsewhere.
For example, you can put an extra 5 percent of your salary into an investment Isa, where you will not receive a tax credit for 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 is a personal choice.
Top of the stack: The sooner you start saving for your pension, the better.
Pension supplies – the things you need to know
Defined contribution versus defined benefit
There are two main types of pension schemes: defined contribution plans and defined benefit plans (also called final pay).
A pension based on defined 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 to a certain level.
The money is saved in a pension and then invested in funds with the intent that it will grow over the years to deliver a pension.
You are able to track the investments, measure how they perform and change them if you want.
However, it is up to you to build up your pot that you need for your retirement, so it's important to keep track of payments as soon as you start and reassess how much you can pay every few years.
In the case of a pension plan with an objective to be achieved, your employer will usually pay a certain amount of your last salary when you retire and they will assume the responsibility for financing it.
There are other types of defined benefit plans, such as career-adjusted schemes 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 the full details with your provider.
However, planned plans for defined benefit plans have proven to be 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 few more years to work will depend on a pension based on fixed premiums for a large part of their pension income.
Types of work pension
Defined contribution plan
An employee agrees to pay a certain amount in his defined contribution plan, say 5 percent of his income.
Their employer can match this, so 10 percent of their total income goes to the pension every month (5% + 5%).
The money is invested in equity funds and the pot grows over the years. Upon retirement, the saver must take his pot and buy an income with it or attract one for himself.
An employee agrees to pay in a certain amount per month for their last wage pension, say 8 per cent of their income.
In exchange, their employer pays them a fixed part of their final salary for each year they have worked there, in this case a sixtieth.
A person who had worked for the company and had been a member of the pension scheme for 40 years would therefore have to retire with two-thirds of his final salary (40/60).
Where does the automatic registration of pensions pass?
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 their retirement
As a result, the government has mandated the Pension Regulator to ensure that employers work out a plan that is considered crucial to ensure that people have more pension income to increase the payment of state pensions.
The rules mean that if you are an employee, your employer must offer you a pension scheme.
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 not do anything, you will be automatically signed up.
By 2018 all employers will have to contribute according to the law to the pensions of their employees, but to start with, only larger companies have to offer this.
More than 5 million people have been automatically enrolled since the start in October 2012, and fewer than 1 in 10 chose to unsubscribe, according to figures from the government.
The law says that a minimum percentage of your & # 39; eligible income & # 39; must be paid into your employer's scheme, this 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 from you and 1 percent from 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 because of individual regulations.
|The minimum you pay||The minimum that your employer pays||The government pays|
|0.8% of your & # 39; eligible income & # 39; rises to 4% in 2018||1% of your & # 39; eligible income; rises to 3% by 2018||0.2% of your & # 39; eligible income & # 39; rises to 1% in 2018|
Tax reduction on contributions to your pension fund
Tax deduction on contributions to your pension funds means that part of the money that would have gone into income tax would go to your pension instead.
If you pay your own money or a pension from your employer, you will automatically receive 20 percent tax relief.
For example, you are a taxpayer with a lower rate and you deposit £ 80 of your tax money into your pension. You would have earned £ 100 before the income tax was applied, so you would get a tax reduction of £ 20.
It gets a bit more complicated if you're a 40 percent higher taxpayer, because you can claim help for 20 percent extra – but you may have to do this yourself – while taxpayers of the highest level can back up to 45 percent. percent tax rate.
How taxpayers with higher rates receive 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 maximized at 100 percent of your income in a year, or with the annual contribution of £ 40,000 per year. A lifelong deduction of £ 1 million on the size of a pension fund also applies, including the money you pay and whatever it grows. Above that, it is no longer tax efficient to save a pension.
Are you self-employed or do you want to give your pension pot a boost, then you can – or instead of – work your pension to 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 for your personal pension contribution, as explained above.
Do not 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 provided by the government – now £ 155.65 per person for a single person in the new fixed income system.
The AOW age should be raised in the coming years, you can use the HMRC state pension calculator to see when you qualify.
For a 35-year-old today, the AOW age is 68 years.
Although it may not seem like a large amount, it is a good basis to build up your retirement income.
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