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How much should I pay into my pension?

View profile for Paul Chilver
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This is a question which many people find themselves asking. Whether they are approaching retirement or they are starting to save into a pension for the first time.

There are various suggestions from different sources as to how much you should be saving into a pension. Some people believe that 15% of your annual salary is sufficient. Others suggest that you should half your age (from when you started saving from) and put that number as a percentage of your salary into your pension each month.

In truth, there is no definitive answer or magic formula to use when it comes to saving into your pension. There are numerous factors to consider such as: -

  • When are you hoping to retire and how long do you have to “bolster” your pension pot?
  • How much money have you already saved into your pension pot?
  • Do you have any other savings or assets separate from your pension which could be used for retirement income/provisions?
  • If you are employed, how much does your employer contribute to your pension?
  • Will your pension contributions be likely to increase/decrease in the future?
  • What level of investment growth might you expect on your pension savings?
  • At what age do you expect to retire?

The primary objective of a pension is to try and provide sufficient income in retirement and to enjoy a particular standard of living. Therefore, a key factor when it comes to pension saving is how much money do you need/want in retirement.

According to a study by consumer group Which?, the average retired couple requires approximately £18,000 per year to cover basic living expenses. This figure increases to circa £26,000 per annum with some spending (such as holidays and leisure activities) added in.

Depending on your eligibility, most people will receive some form of State Pension. However, as you can see from the above figures, the State Pension is likely to be insufficient in isolation when it comes to retirement. In addition to this, the State Pension may come into payment much later than many would like.

Longevity risk is also another topic which should be considered when it comes to retirement saving. According to the Office for National Statistics (ONS), the number of Britons aged 80 and over are expected to grow by 59%, to over 5.2M in the next 20 years. With the average life expectancy for a 65-year-old male and female being 18.6 years and 21 years, respectively. This highlights the fact that our pensions will need to work longer and harder for us.

Aside from providing an income in retirement, pensions are also attractive when it comes to estate planning which adds a further benefit to pension arrangements.

It has never been more important to ensure you are keeping on track with your retirement savings, it is also wise to regularly review your contribution levels.

If you are looking for guidance on existing pensions, or saving into a new pension, please contact me for an initial discussion on 01206 217329