How much should you pay into your pension?
A question often asked by those seeking financial advice is, ‘How much should you pay into your pension?’ Everyone knows that they need to save for retirement, but the big question is “How much?” I have come across many different formulas for the calculation. Some are quite good; others are seriously flawed. Let us see if we can shed some light on the subject.
In this article, we highlight the ways to understand how much you should pay into your pension. We cover topics like:
- Setting your retirement income
- The 50/70 rule
- Adjusting your pension contributions
- A formula for how much to pay into your pension
- The annual allowance and tax
As a result of reading this article, we hope you understand how much you should pay into your pension. It’s better to know now, rather than asking yourself, ‘How much do I need to pay into a pension’ because you’re started too late.
What is your target retirement income?
The first thing to think about when considering how much should you pay into your pension is your target income at your desired retirement age. It helps to have an imagination and to visualise yourself in retirement.
Will you be active?
Or sedentary?
Retirement can be viewed as one long endless holiday and your spending plans should be considered accordingly. Genuine retirement means stopping work completely. Therefore, how much would you need monthly to be able to retain your standard of living?
The 50-70 rule
If you are struggling for an answer, the 50-70 rule might help. This suggests that you should aim for an annual income of between 50% and 70% of your working income. If you earn £50,000 for example, you’d want to achieve somewhere between £25,000 and £30,000 per year as your retirement income.
A more accurate way would be to estimate your expenditure in retirement and aim for an income that would cover your expenses whilst leaving you with enough of a surplus to cover the unknown.
Related reading
In the next section of this article, we focus on the age you wish to retire and how much you may need to live on in retirement.
What is your ideal retirement age?
The current state pension age is 66, scheduled to rise to 67 between 2026 and 2028 and potentially to 68 between 2037 and 2039. The state pension age is kept under review which means that it could change in the future. For most people, pensions become available at age 55 and your personal retirement age could be any age between 55 and 75.
How much do you need to live on in retirement?
The important thing to consider when asking how much you should pay into your pension, whatever retirement age you choose, is how much you’d need to live on in retirement. Retiring earlier would mean having less time to build your savings, making it more of a challenge.
Conversely, retiring later would mean having a longer period to save, making it less of a challenge. Either way, it is important to start saving for retirement as young as possible. If you leave it too late, you could fall into the pensioner poverty trap, and find yourself working in later life.
If you would like to see a snapshot of your financial future, try using Standard Life’s pension calculator.
The formula for how much you should pay into your pension
One easy way of figuring out roughly how much you should pay into your pension each month as a minimum, would be to take the age at which you open your pension account (let’s assume age 40) and divide this figure by two. The result, (in this case 20) is the percentage of your pre-tax salary that you should be paying into your pension pot until you retire. This assumes you retire at state pension age.
A working example
Using this formula, a 40-year-old earning £60,000 per year should pay 20% x £60,000 = £12,000 per year or £1,000 per month as a minimum. This figure should be adjusted with salary increases and inflation. You’d have to speak to a financial adviser if you’d prefer a more accurate income calculation.
Your financial adviser would have tools enabling them to factor in things like inflation, investment growth rates, risk, stress tests such as stock market falls, and events like time off work and contribution fluctuations.
Summary: How much should you pay into your pension?
Whilst there is no hard and fast answer, to how much you should pay into your pension, Most importantly, the earlier you start saving, the better. The best time for you to have started saving for retirement was probably a good few years ago. The second best time is now.
Article FAQs
Looking to learn more about how much you need to pay into a pension?
Here is a selection of helpful FAQs.
Is there a calculation for how much I need to pay into my pension?
There are general, historical guidelines suggesting pension contributions need to be about 15% of your annual salary. However, each individual has their own retirement goals and people start investing in a pension at different times of their lives.
This applies to you, too. Think about the retirement you want, and how much you may need to live on. Consider any pension n you may already have. Then maybe use a pension calculator to see if and where you may fall short.
Should I adjust my pension contributions if my salary changes?
If your salary increases, consider increasing your pension contributions to help raise your projected retirement income. Should you not, you may have to make lifestyle adjustments when you reach retirement age.
On the other hand, if you find yourself earning less money, you may need to, reduce your pension contributions to an affordable level. However, if you can maintain the same contribution, you will benefit long term.
What strategies can I use to catch up if I start saving for retirement late?
Be careful about using phrases like ‘catching up.’ If you are suffering from retirement anxiety, and want to catch up, you may make emotionally driven, poor investment decisions.
Firstly, take stock of where you are financially. Then think about what an adequate, ideal, or dream retirement would look like. Then consult a retirement planner to see what you will need to earn and invest to achieve each of them.
That said, one way to increase the value of your pension is to make lump sum contributions if you come into some money.
Are there tax implications for contributing above a certain amount to my pension?
Exceeding the annual allowance for pension contributions can result in a tax charge, making it crucial to monitor and manage your contributions accordingly.
Please note, that we have not included exact figures as they are subject to change.
You can find more about the annual allowance for pensions from the UK government’s website.
How do my investment choices affect how much I should pay into my pension?
Opting for higher-risk investments might lead to higher returns, potentially reducing the amount you need to contribute. However, you may find your investment strategy does not pay off. As a result, you may need to move to a more balanced approach and increase how much you pay into your pension.
It is important to align your investment options with your overall risk tolerance and retirement goals to ensure your contributions are working as efficiently as possible.
How much do I need to pay into my pension?
If you are looking for clarity, try our pension calculator today.
Simply fill in the gaps to see where you are in your financial journey toward retirement.
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