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How much should I pay into my pension? Is 12% the magic number?

The new tax year brings new pension allowances, making it a good time to review your retirement savings. But are you saving enough?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

6 April marked the start of a new financial year, and with it brings new opportunities to save tax-efficiently. This includes getting the most out of your pension.

Your pension allowances have refreshed, meaning you can pay in up to as much as you earn, up to your available annual allowance across the year, and receive tax relief.

But there are lots of misconceptions about how much you need to save for retirement.

Research suggests that over half of those aged between 18 and State Pension age think the minimum automatic enrolment rate (about 8% of your salary), split between you and your employer, is enough.

There are likely to be others that believe that the State Pension alone will be enough for an adequate income. In reality it could barely be enough to cover essential bills.

This article isn't personal advice. If you're not sure if an action is right for you, ask for financial advice. Pension and tax rules can change, and the value of any benefits depend on your circumstances. Scottish tax rates and bands are different and other benefits apply.

How much should I save for retirement?

How much you should put in to your pension depends on your personal circumstances, like how much you can afford to. But it's important to think about what standard of living you'd like in retirement.

Over a 50-year working life, from age 18 to 68, paying in around 12% of your salary should be enough for a modest retirement income for a single person. This 12% includes employer contributions as part of auto-enrolment. Combined with the State Pension, that's around £20,200* a year in today's money after tax.

This should allow a standard of living where you're financially secure and have some flexibility. You could even enjoy a holiday abroad every year and have a relatively new car every 10 years.

If you want to target a more comfortable retirement (around £33,000* each year for a single person after tax), you may need to contribute as much as 24% into your pension. This should give you more financial security and freedom. Luxuries could include maybe a couple of holidays abroad and spending up to £1,500 on clothing and footwear every year.

* Figures are based on a single person living outside London in retirement.

Remember, you can't normally take money out of your pension until age 55 (rising to 57 in 2028). When you can access it, up to 25% is usually tax free, the rest is taxed as income.


What if I plan to take a career break?

If you haven't paid into a pension your whole working life or you've had career breaks, you'll probably need to pay in more than 12% of your salary.

Let's say you take a three-year career break in your 20s. This three-year gap could cost you at least a further 1% in pension contributions if you wanted to aim for a modest income and retire at State Pension age. Meaning you might need to save at least 13% of your salary each year into your pension.

If you're planning a career break and can afford to, it could be worth trying to keep some level of pension contributions going, no matter how low they are. If a career break is to care for children or elderly relatives, you could think about retirement planning as a family.

Can I cancel or pause pension contributions?

Understandably, for many the pandemic has meant cutting back on outgoings – including adding money to your pension.

Being able to cancel or pause pension contributions is something which helps to make pension saving affordable and flexible. But you should consider the long-term implications. It could mean you end up compromising your future income and standard of living in later life. A small cut-back now could end up costing you thousands in the long run.

Let's say you paused a £100 monthly direct debit for three years. You'd have missed out on £4,500 in your pension because the government would have added £900 in basic rate tax relief on top of your £3,600. And, if the monthly payments had been invested within the pension and had grown by 4% a year (not including charges), then that money could have been worth £4,783.

Remember though, all investments can fall as well as rise in value, so you could get back less than you invest. Actual returns will depend on the investments you choose.


Is your pension on track?

It's a good habit to use a pension calculator once a year. This can help you to fine-tune your retirement plans and check you're on track for the retirement you want.

The calculator will show you the impact of increasing any regular contributions and the effects that inflation and charges can have on your pension value.

If you're not on track, why not get the new tax year off to a flying start by paying in and investing early – after all, the earlier you start the better.

If you'd like to get a head start, here's everything you need, including some investment ideas, to help you take advantage of the new tax year.


What did you think of this article?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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