How much should I pay into my pension?

What is a good pension amount?

Some advisers recommend that you save up to 10 times your average working-life salary by the time you retire.

So if your average salary is £30,000 you should aim for a pension pot of around £300,000.

Another top tip is that you should save 12.5% of your monthly salary.

With a workplace pension, this is more achievable if your employer matches your contributions.

For example, if you earned £30,000 a year and paid £125 per month (5% of your salary), your employer would contribute £75 (3% of your salary). 

Some employers offer a higher contribution if you increase the amount you pay in. 

Those are the quick ways to work out how much you should save. But for a clearer idea of how much pension pot you’ll need, use the following simple guide to retirement saving.

What’s my target income in retirement?

The first thing to decide is your desired retirement income.

How much pension do you need to live comfortably?

For a quick estimate, try the '50-70' rule. This suggests that you should aim for an annual income that is between 50% and 70% of your working income.

So if you earn £50,000 now, you will want to achieve somewhere between £25,000 and £35,000 a year.

If you want a more accurate figure, you’ll have to do a few sums.

Calculating your retirement income needs

1. Start with your current monthly expenditure

2. Deduct any regular costs that may no longer apply after retirement, such as:

   • Mortgage repayments (if you expect to have paid off your mortgage by then)
   • Commuting costs
   • Pension contributions
   • Regular savings

3. Make any additional deductions for reduced housekeeping costs (e.g. if you have children who will no longer live at home). A smaller household can mean lower bills for:

   • Food
   • Energy
   • Entertainment
   • Transport
   • Holidays

4. Think about any other savings you could make, such as

   • Running fewer cars or getting a cheaper vehicle
   • Taking holidays at cheaper times

This will give you a new figure for the monthly income on which you could, in theory, live comfortably.

Find out how much retirement income you might receive from your private pension and how to boost it by using our pension calculator.

What extra money might I need in retirement?

In working out your target income, we’ve assumed your needs and spending stay roughly the same.

In reality, that won’t be the case. You’ll want to indulge yourself now and then, and will continue to face one-off expenses.

Additional costs might include:

• Luxury holidays
• Home repairs r improvements
• Dental or medical expenses
• Vet’s bills (if you have pets)
• Helping your children financially
• Saving for care costs in later life

It’s, therefore, sensible to aim for a comfortable safety margin when saving for retirement, rather than just the bare minimum.

This might mean a higher income, or just a larger pension pot (this depends on how you choose to take your pension).

Also, remember that the cost of living may increase significantly by the time you retire.

Typically, the cost of living doubles every 25 years, so work out what it might be by the time you retire (and also by the end of your retirement!).

How long will my retirement be?

To work out how much you need to save, you need an idea of how long your retirement could last. This means estimating:

• Your retirement age
• How long you will live

A typical retirement age might be 65.

You may wish to retire sooner, but you’ll need to factor this into your calculations (as it means less time saving and also more time living off your pension).

If you retire later than 65, you may not need to save as much, but will probably be able to save more.

Your lifespan is less easy to guess, but you can get a rough idea (based on your health and lifestyle) by using a life expectancy calculator.

Broadly, an average 65-year-old today who retires aged 65 could expect to live to around the age of 83 for men or 86 for women.

Those who keep fit and have a healthier lifestyle could live beyond these ages. While that’s good news, it does mean you’ll need more savings.

How much state pension will I receive?

If you qualify for the full new state pension, you’ll receive £203.85 per week from your state pension age.

This state pension age is currently 66, but this is due to rise to 67 from 2026. 

This works out as an income of around £10,600 per year, guaranteed for life.

The amount will also increase over time, so it will maintain its buying power - and when inflation and/or wage growth is below 2.5%, it will outgrow both of them, thanks to the 'triple lock'. 

On its own it’s clearly not enough to live on, but may be vital in helping you achieve a sustainable retirement income from your private pension(s).

Do I have any final salary pensions?

Some workplace pensions are a special type known as final salary or defined benefit, which provide a guaranteed income for life.

If you have one, or think you might, find out how much it will pay you and when the payments will start (your ‘pensionable age’).

Add this figure to your state pension to keep a running total of your guaranteed income.

Now, you can start to work out how much more income you might need from other pension pots.

How big should my pension pot be?

Now you can ask, ‘What size pension pot do I need?’

You should now have the two most important figures to hand:

• Your preferred annual income in retirement
• Your guaranteed income in retirement

Deduct your guaranteed income from your preferred income to find the amount you’ll need to generate from other sources (e.g. your pension pots).

An example: Steve's pension pot

Steve has no final salary pensions and expects to receive the full new state pension from the age of 68. He is aiming for an annual retirement income of £25,000. From 68 onwards, he’ll need to make up around £14,400 a year from his private pensions. If he retires at 65, then for three years, he’ll need to find the full annual £25,000 himself.

Assuming Steve lives to the age of 85, how big would his pension pot have to be to generate that kind of income?

Suppose Steve has saved a pot of £250,000. His financial adviser finds him a drawdown scheme which achieves a steady 4% growth. Steve draws £25,000 a year for three years, followed by £14,400 for each subsequent year (once he starts receiving his state pension).

Assuming nothing else changes, the pot will run out in around 20 years, which is almost spot-on as far as Steve is concerned.

However, this example depends on his pot growing by a steady 4%. If growth is lower (particularly in the early years) or if Steve takes out more, his pot will run out much sooner. Furthermore, Steve may live to be a lot older than 85.

How much can I pay into my pension?

Up to now, we’ve only asked, ‘How much should I pay into my pension?’ – but the other big question, especially for higher earners, is how much you’re permitted to pay in.

There is an annual allowance (how much you can pay into your pension each year) that limits the amount you can save into pensions and still get tax relief.

Find out about your pension allowances.

How much can I pay into my pension if unemployed?

Ordinarily, a person can’t pay more into pensions each year than they earn in salary.

But what if you have no earnings, or earn very little?

Fortunately, you can still pay in a reasonable amount and receive tax relief on it, provided you can find the money to do so (e.g. your spouse might give you the money, or you might have other savings).

If you earn less than £3,600, you can pay up to £2,880 a year into a personal pension (e.g. a stakeholder pension or a SIPP).

This money benefits from tax relief to become £3,600 (and since you’re not actually paying tax, this is exceptionally good value).

This is enough to build up a decent-sized pension pot – in 20 years, you could have over £100,000, and in 30, you could have over £200,000.

How can I stop my pension from running out?

If you’d rather have the safeguard of a guaranteed income for life, you may prefer to buy an annuity with your pension pot rather than use a drawdown scheme.

The advantage of an annuity is that it never runs out. The downside is that the annual income may be lower than with a drawdown scheme.

In the example above, what if Steve chose an annuity instead? At today’s best annuity rates, he could use his £250,000 pension pot to buy a guaranteed income of around £10,600 per year (nearly £4,000 less than his target amount).

On the plus side, he would have more security if he were to live a very long time.

However, another option for Steve might be to buy an annuity with £100,000 of his pension pot (bringing an income of roughly £4,215) and drawing down the remaining £150,000 to achieve a total income of £25,000 a year.

In this example (assuming 4% growth on his drawdown scheme), his drawdown would again run out in around 20 years – but after that, he would be left with a guaranteed income of £14,815 (his annuity + state pension).

Can I use other sources of income in retirement?

If your pension pot isn’t enough to meet your needs – or if you ‘outlive’ it – then you may have to find other sources of retirement income.

These might include:

• Equity release (unlocking value from your home)
• Downsizing
• Renting out a room in your house

If you can’t do any of these, or if you don’t own your own home, then you may find yourself completely reliant on the state pension if your private pension runs out.

Am I saving enough into my pension?

The first thing to do is find out how much is in your pension pots now.

You may also have old pension pots from previous employments – track these down and ask your adviser about combining them into one pot (‘pension consolidation’).

Your pension provider should be able to give a projection of your expected pension pot at the age of 65 (or whenever you plan to retire).

You can also ask a financial adviser to give you an independent forecast.

You can then discuss your retirement income needs with your adviser, who will be able to tell you if your projected pension pot will be large enough to meet them. If not, he or she can recommend an affordable increase in your monthly pension contributions.

Remember: every pension contribution you make benefits from at least 20% tax relief, and if you have a workplace pension, your employer also contributes to it – making it the single most efficient way to save money for your future.

Did you find this article useful? Then you might also find our article on pension alternatives informative, too!