A pension can help you live comfortably, financially free, and with dignity in later life. That's why retirement consultants emphasise growing your pension pot while you work so you don't experience financial hardship after retirement.
But a question often comes to mind: How much should I pay into my pension? There's no clear-cut answer. It depends on several factors, such as your investments, monthly pay, and personal goals after retirement. Also, consider what you can afford, your pension contribution limitations, lifetime and annual pension allowances, and tax relief on your contributions.
In this blog, we will discuss the nitty-gritty details of your pension.
How Much Should I Pay into My Pension?
In the UK, pension contributions aren't capped. You can fund your pension (or pensions) without any limit. However, the tax treatment of your contributions varies, which may impact your financial situation.
You can make as many annual contributions to your pension as you want. However, you will only be eligible for tax relief of up to a monthly average of GBP 5,000 (or a maximum pension contribution value of GBP 60,000 annually) or 100% of your salary, whichever is lower).
If you exceed these thresholds, your contributions might not be eligible for tax relief. There might be other tax implications, which you need to find out if they apply to you.
What is a Good Pension Amount?
If you approach an excellent accountancy firm in London, they would advise you to save at least ten times your typical working-life pay. That means you must strive for a pension plan of about GBP 300,000 if your average salary is GBP 30,000.
Another suggestion is to save 12.5% of your monthly salary. This is easier to achieve with a working pension wherein the employer matches your contributions. For instance, your company would pay GBP 75 (3% of your income) if you made GBP 30,000 annually and paid GBP 125 monthly (5% of your salary). Some employers may match your increased contribution if you spend more.
The Golden Rule for Pension Savings
Determining your ideal retirement income should be the first thing. What would be your required monthly pension, inflation-adjusted, to live comfortably? Use the '50-70' rule to get an estimate. According to this, your annual pension should be between 50% and 70% of what you make from your job.
Thus, if your current income is GBP 50,000, your goal should be to put between GBP 25,000 and GBP 35,000 annually into your retirement funds.
Don't Forget the State Pension
Remember that you need to be qualified for a government pension. The maximum payment under the new state pension, given to those who reach state pension age after April 6, 2016, is now GBP 203.85 a week, or GBP 10,600 annually.
To receive the maximum benefit, you must have made 35 years of national insurance contributions; if not, you must have made at least 10. You can check how much state pension you could get on the government website.
How Much Personal Pension Do I Need?
Evaluate your earnings in comparison to a GBP 10,600 retirement income that is entirely provided by the state pension. It would not be possible to retire comfortably on the state pension alone. You must put money aside in a business or personal pension plan to live comfortably.
The government provides you with tax relief, which is free cash:
- There is a 20% tax rebate for basic-rate taxpayers.
- Taxpayers with higher rates receive 40%
- Taxpayers at additional rates receive 45%
Decide how much income you desire each year as a starting point for determining how much to contribute to your pension.
Take Advantage of Your Workplace Pension
Your employer must automatically enroll you in a workplace pension plan unless you choose not to. Workplace pension plans are fantastic because your employer is also legally required to contribute funds on your behalf.
Under the government's auto-enrolment programme, your employer must contribute at least 3% of your earnings (although most employees contribute 5%). Some employers match your contributions or contribute more than 3%.
Certain workplace pensions, referred to as final salary or defined benefit plans, offer a lifelong guaranteed income. If you think you might have one, find out what it will pay you and when it will start paying (your "pensionable age").
Add this amount to your state pension to maintain a running total of your guaranteed income.
If I am Unemployed, How Much May I Contribute to My Pension?
People typically cannot contribute more to a pension than they are paid. What happens if you make very little or nothing at all? Fortunately, if you can make money to contribute to a retirement, you can still do so and obtain tax relief. For example, your spouse may give you money or you may have other funds.
You can contribute up to GBP 2,880 annually to a personal pension (such as a SIPP or stakeholder pension) if your annual income is less than GBP 3,600. Tax relief increases this amount to £3,600 (which is good value because you aren't actually paying tax on it).
This is sufficient to accumulate a considerable pension fund; in twenty years, you may have accumulated over GBP 100,000, and in thirty, over GBP 200,000.
How Long Will My Retirement Be?
You need to know how long your retirement could last to calculate how much you need to save. This entails approximating:
- Your retirement age
- How much time you have left to live
A typical retirement age might be 65. If you want to retire earlier, calculate your pension contribution requirements based on the age you want to retire. Also, your savings requirements may decrease and your available funds will likely increase if you retire after age 65.
Predicting how long you will live is hard, but you may use a life expectancy calculator to obtain an approximate figure based on your health and lifestyle.
Is My Pension Fund Sufficiently Funded?
Your first step should be to determine how much is currently in your pension pots. You could also have old pension plans from prior jobs. Find them and discuss with an online accountant in the UK the possibility of consolidating them into a single plan (also known as "pension consolidation").
A prediction of your projected pension pool at age 65 or whenever you want to retire should be available from your pension provider. You may also get an unbiased prediction from your online accountant.
The accountant will then be able to advise you on whether your estimated pension fund will be sufficient to fulfil your retirement income needs once you have discussed them with them. If so, they might suggest raising your monthly pension contributions to a manageable level.
How Can Unicorn Accountants Help You?
Knowing "how much should I pay into my pension" is essential to ensure financial independence after retirement. If you need advice on planning for your retirement, consult Unicorn Accountants.
Get one-to-one advice on pension consolidation, tax relief, and contribution caps from our expert consultants, who have helped thousands secure a financially independent retirement. Talk to Unicorn Accountants, your trusted partners for financial security, today.