We are all aware we should be saving for our pension, but should how much is enough for your long-term goals? Jaskarn Pawar tells us more.

This is a common question I get asked all the time. My guess is that most people end up paying a nominal amount into a pension to make themselves feel like they are saving for retirement.

“Do the maths and be bold in your choice of regular savings amount. You will benefit from it sooner rather than later and be able retire before you ever imagined you could”

In reality, by investing an amount that has not been thought through is probably nothing more than semi-wasting money. It’s not a complete waste of money because you are still investing and benefitting from the tax advantages of a pension. But it might not be the best use of your money.

Investing £100 per month for 20 years without fail could give you a lump sum of just over £40,000 (assuming a growth rate of 5 per cent). If you decide to take the maximum tax-free cash from your pension at that point you will have £30,000 left to buy an income, which could be in the region of £1,500 per annum. That is obviously not enough to live off.
A lot of people blame pensions for poor performance and it is true that many pensions impose charges that are higher than you could be paying under a newer product. But a lack of real investment, poor selection of funds and ongoing management are more often than not the real reasons behind poor performance in my experience.

If you are a basic rate taxpayer, and you are investing a nominal sum into a pension, then the chances are that you will also be a basic rate taxpayer in retirement. If that is true then don’t invest in pensions because they are tax efficient. You will get a basic rate tax rebate on your investment in to a pensions, but you will also have to pay basic rate tax when you draw income out of the pension. So by investing smaller amounts without really thinking it through could well be a waste of money. You could opt to choose an ISA instead, which offers just as much tax efficient growth as a pension to your invested funds.

So, how much should you invest in a pensions? I would say enough to get you a good income as soon as possible. Do the maths and be bold in your choice of regular savings amount. You will benefit from it sooner rather than later and be able retire before you ever imagined you could.

For more pensions, savings and retirement advice speak to a local independent financial adviser.
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About the author

Jaskarn Pawar is a Chartered Financial Planner and Certified Financial Planner. He has more than 10 years’ experience and currently advises clients on integrating investment planning with financial planning.