It can be hard to know where to begin when it comes to thinking about your pension contributions. We’ve found that many people like you ask:
- When I start out, how much should I be paying into my pension?
- How much do other people pay into their pensions – and does that change as they age?
- If I’m getting closer to retirement and haven’t saved much, have I run out of time?
We’ve put together this article to help you with some answers.
When do you start paying into a pension?
What age you can start a pension depends on who’s setting up your pension and what kind of pension you want to pay into.
- Someone else can start a personal pension for you at any age.
- Once you’re 16+ you can opt in to your employer’s workplace pension scheme
- You can start your own personal pension once you turn 18.
Of course, just because you can start a pension then doesn’t mean you will. In April 2021, only two in ten employees aged between 16 and 21 had one up and running.
On the minus side, any money they save once they do get a pension won’t have as long to grow. But on the plus side, setting up a pension only gets easier. Once you’re 21 or older, if you get a job that pays more than £10,000 a year your employer will sign you on to their pension scheme and start contributing to it too. And you can ask them to enrol you in it if you’re earning £6,240 or more.
That’s why many of us end up with lots of pensions – each new job often brings a new one. Although you can usually consolidate them, to keep things simpler.
Want to learn more about bringing your pensions together?
Your pension savings might be worth more than you think. Learn more about finding old pensions and how our pension tracing service can help.
How much will my pension be worth?
The value of your pension pot isn’t guaranteed and can be hard to predict, especially if you’re a long way from retirement. And in this context, value can describe two different things:
- the amount you have saved in your pot when you retire
- the income your pot can give you once you’ve retired.
One thing’s always true though: the sooner you start making regular payments into your pot, the more time:
- you have to build up your pot
- your investments have to grow (though of course their value can also shrink).
Working out how much you might have in your pot when you retire
That depends on how much money goes into it, what sort of investments you choose to make and how well (or not) they do over the years.
Here’s an example of how that could work out. We’ve worked out how much you’d end up with if you and your employer paid a monthly total of £150 into your pension, including tax relief. We’ve based our calculations on a default fund and assumed a growth rate of 2.9% a year. This growth has taken into account an inflation rate of 2% and annual charges of an Annual Management Charge (AMC) of 0.37% and Fund Management Charge (FMC) of 0.13%. Your charges might be higher or lower than these. You can learn more about these in our article on pension fees and charges.
|If you start your plan on your:||Once you’re 67, you’ll have:|
To find out your own pension’s growth rate, ask your provider or employer, or check your pension statement. It could also be worth making sure that you’re happy with the funds you’ve chosen.
And remember, this is just an example based on some specific assumptions. Those assumptions won’t apply to your pension. Growth rates will vary and you might have put your money in different kinds of fund.
There’s also no guarantee that your investments will grow. As with any investment, their value might go down. You could even get back less than you paid in.
Working out how much income your pension pot can give you
When you reach 67, you’ll probably be able to take up to 25% of your pension pot as a tax-free lump sum. So let’s start by assuming you do that. Based on our pension estimates above:
|If you started your plan on your:||Your tax-free lump sum will be:|
Then you need to decide what you’re going to do with the rest of your pot. If you’re looking for financial stability, an annuity could be a good choice. Buying one will give you a guaranteed income for life. Though do make sure you choose the right one - you can’t change it once you’ve taken it out.
Based on the same assumptions as above, once you’ve taken your tax-free lump sum:
|If you started your plan on your:||You could buy an annuity that gives you:|
|25th birthday||£4,150 a year|
|35th birthday||£2,980 a year|
|45th birthday||£1,970 a year|
|55th birthday||£1,040 a year|
When we worked those figures out, we assumed that:
- you’re buying a single annuity that pays the same amount every month for the rest of your life, and for no less than five years
- you haven't chosen to switch your payments to a loved one after your death.
Because your payments won’t rise with inflation, in real terms their value could go down over the years.
If you’re thinking about buying an annuity now, it’s important to shop around to find the right product for you. Another option is drawdown. Putting your pension pot into drawdown means you leave your money invested for you to take out as and when you need it. The money left invested could grow to replace some or all of the money you drawdown, though its value could also drop. You can also run out of money, so unlike an annuity your payments aren’t guaranteed. There are other options available to think about when it comes to accessing your pension savings, so before you make a decision you should make an appointment with Pension Wise, a free government guidance service from MoneyHelper.
And remember, these calculations don’t include your State Pension. You might also have other sources of income to factor in. Adding them all together will give you a sense of how much your retirement income could end up being.
How much should I put into my pension?
Questions like “How much should I put in my pension?” are difficult to answer. How much you should pay into a pension depends on a lot of different factors, from what sort of lifestyle you’d prefer in retirement to how much you can afford to save just now.
Start by thinking about what your ideal retirement might look like and how much it could cost. For a little help, visit the Retirement Living Standards website. It’ll help you rough out how much income you might need.
Then you’ll need to think about how long you’ll need it for.
What sort of age do you want to retire at?
- Some people save hard to stop working aged 55 or even younger.
- Most of us have to keep going to pay the bills and keep a roof over our heads.
- A few are lucky enough to love what they do and keep going for as long as possible.
And how long do you think your retirement will last? Hopefully for as long as possible – but if you’re hoping for a few decades of luxury trips, you’ll need to put a fair amount away to pay for them.
And whatever other choices you make, you’ll hopefully end up with regular State Pension payments. At the moment:
- The most you can get is £10,600 a year
- To get that, you’ll need to have paid National Insurance for the full 35 years.
Right now you need to be 66 to claim it, but that will go up to 68 over the next few years.
How much should I contribute to my pension by age?
That’s a difficult question to answer, because the ideal pension contribution level doesn’t just depend on your age. It’s also a question of how much money you’re making, how much you can afford to save, what sort of retirement you’re aiming for and lots of other factors.
But there’s one tip that might be helpful.
- Many people work out how much they should be investing by halving their age. That gives you a rough idea of what percentage of your salary should go to your pension.
- For example if you’re 30, set things up so your pension contributions (including any money from your employer) equal 15% of your salary.
- Remember that that’s just a suggested amount. It might not be a realistic possibility for you – especially as you get older and the amount to save climbs to 25% or more of your salary.
There are also three important general principles to bear in mind when you’re asking: “How much should I be putting in my pension?”:
- The sooner you start investing in it, the better. That gives your money more time to grow and ride out any stock market ups and downs.
- You might be able to invest more by cutting down your spending elsewhere. Map out your monthly budget and see if there’s anything you can strip out of it.
- If you get a pay rise or bonus, think about putting some or all of the extra money straight into your pension so you don’t get too used to having it around.
If you need some investment inspiration, it could be worth looking into the Financial Independence Retire Early (FIRE) movement. They’ve spent a lot of time and effort working out how to save and invest as efficiently as possible.
What is the average pension contribution in the UK?
Across the UK, 6.8 million people were investing in their pensions in 2020-2021. Many of those people will have had help from their employers. If you’ve got a workplace pension, they’ll normally top it up with at least 3% of your salary. Exactly how that works and how much you’ll get will vary. Some will match any contribution you make and some might even double it.
Oh, and you’ll probably be chipping in at least 5% of your own salary. The exact amount is entirely up to you, though of course it could affect how much your employer adds in too.