The amount you should be paying into your pension depends on how much you already have saved, your financial situation and how close you are to retirement.
Auto-enrolment has made it easier for most people to save into a pension, as it means you’ll usually be automatically enrolled into a company scheme when you start work. Under current rules, you and your employer combined must contribute at least 8% of qualifying earnings into a workplace pension if you earn over £10,000 a year (employees must pay at least 5% and employers the remaining 3%.
While this has had a great impact on the number of people investing in their retirement, if you are able to, you should ideally consider paying in more. You can find out more about auto-enrolment in our guide How does pension auto-enrolment work?
Here we explain how much you might want to save for retirement, as well as some key considerations if you’re considering upping your pension contributions.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
How to decide how much to pay into your pension
There’s no one-size-fits-all answer to how much you should be paying into your pension, and what’s right for you won’t be right for someone else.
The simple answer is that you should pay in as much as you can afford, without leaving yourself overstretched financially. Some experts suggest that the easiest way to work out how much you can pay into your pension is to take your age, halve it, and then pay this percentage of your monthly wage into your pension. So, for example, if you are aged 50, in an ideal world you’d pay 25% of your wages each month into your pension.
However, this will be impossible for many people to do, especially as living costs continue to soar, but there may be certain areas you might be able to cut back on so you can pay a little bit more into your pension. Try asking yourself the following questions to add some shape to your retirement plans:
What do you want your retirement to look like?
Are you hoping to spend your retirement jet-setting around the world, or are you planning to spend more time with loved ones? Whatever your plans, it’s worth considering how much you might need to fund them each year.
The Pensions and Lifetime Savings Association (PLSA) suggests that with the rising cost of living, the average person will need an annual income of at least £14,400 to achieve a minimum standard of living in retirement. Of course, this is only for a minimum standard of living, and doesn’t include mortgage or rent costs, so if you’re hoping for multiple foreign holidays each year, you will need to save more. Find out more about the PLSA’s estimates in our article £14,400 annual income needed to retire, say pension experts.
Do you have existing pension savings?
If you have any existing pension savings, but aren’t sure of their current value, contact your pension provider and ask them for a pension valuation. You should receive an annual statement from your provider too. This will tell you how much you have saved, and will also provide a projection of what sort of income these savings could provide you with when you come to retire, so you can see whether you’re on track to achieve the retirement you want.
When do you plan to retire?
If you are hoping to retire in the next couple of years, but have limited pension savings, you may need to develop an aggressive pension savings plan to try and achieve the level of retirement income you want. Bear in mind though, that there is an Annual Allowance of £60,000, which is the maximum amount you can contribute to your pension and still benefit from tax relief (more on allowances later).
If you aren’t planning to retire for at least five or ten years, then you have a little more time to save. You may want to consider taking a phased retirement, where you stop work gradually, enabling you to contribute to your pension for longer. Find out more about this in our guide How can I phase my retirement?
When will you start claiming your State Pension?
When it comes to thinking about your State Pension age, it’s useful to know that if you decide you don’t want to retire when you reach your State Pension age, that you can defer your State Pension. If you do this, you will end up with higher State Pension payments when you do start to claim it, as long as you defer it for at least nine weeks.
Learn more about the State Pension in our guide How the State Pension works and about how to defer it in our article Deferring State Pension – How much can I get and is it worth it?
Don’t forget about tax relief
When thinking about paying into your pension, don’t forget the impact that tax relief will have on your overall pension pot.
This basically means that some of the money that you would have paid in tax to the government goes into your pension instead. You will get tax relief at your rate of income tax:
- Basic-rate taxpayers get 20% pension tax relief automatically
- Higher-rate taxpayers can claim 40% pension tax relief (20% automatically, with the remaining 20% claimed via their self-assessment tax return)
- Additional-rate taxpayers can claim 45% pension tax relief (20% automatically, with the remaining 25% claimed via their self-assessment tax return)
If you want to know more about this, have a look at our articles How does pension auto enrolment work?, How pension tax relief works and How do I reclaim higher rate pension tax relief?
Pension contribution allowances and limits
While you can pay 100% of your earnings into your pension each year, any contributions you make that exceed the aforementioned £60,000 Annual Allowance won’t be eligible for tax relief.
The other main pension allowance was the pension Lifetime Allowance, which was the maximum you could save into your pensions over your lifetime without having to pay any extra tax charges when you withdrew your pension. However, on April 6 2023 this allowance was abolished. You can read more about this in our article What is the pension Lifetime Allowance and when is it being abolished?
If you want to know more, you can see more information about them in our article How do pension allowances work?
General rules to remember
There's no time like the present
Even if you’ve never paid into a pension before, it’s never too late to start, and the sooner you start making contributions, the better. Remember the sooner you pay money into your pension, the sooner it can start gaining interest and growing your pension pot. Learn more in our guide Saving into a pension for the first time.
Increase payments whenever you can
It’s useful to think about your pension contributions as a proportion of your earnings, rather than a set figure. This means if your pay increases, so should your pension contributions.
If you can afford to increase your contributions, doing so should ensure you end up with a bigger pension pot at retirement.
Track down any lost pensions
There are as many as 1.6m lost pension pots in the UK, according to Unbiased.co.uk, so make sure you locate any pensions you might have lost track of, as these will help boost your retirement savings.
The government’s Pension Tracing Service may be able to help you do this. You’ll need the name of an employer or pension provider to use the service, but provided you have that, the service should be able to help you find the contact details for your workplace or personal pension scheme. The service won’t, however, tell you whether you have a pension, or what its current value is.
As well as using their online service, you can also contact the Pension Tracing Service by phone on 0800 731 0193. Find out more in our article Tracing lost pensions – How to find my old pensions.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.