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  • How much should I pay into my pension?

    Not sure how much to pay into your pension? Here we explore what to consider when deciding how much to contribute, and why it pays to start early.

    Last Updated: 6 April 2023

    How much you pay into your pension is an important decision.

    Roughly half of pension savers think about 8% of a salary (the minimum automatic enrolment rate), split between them and their employer, is enough. There are likely to be others that believe that the State Pension alone is sufficient.

    Below we explore what to consider when deciding how much to contribute for your retirement, including contributions from your employer and the government.

    This article isn't personal advice. If you're not sure if an action is right for you, ask for financial advice. You usually need to be at least 55 before you can take money out of your pension (rising to 57 in 2028). 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 consider contributing each year?

    Deciding how much to pay into your pension can heavily impact your standard of living in later life. You need to think about what you can afford, how soon you hope to retire, how long your retirement might last and how much money you’ll need in retirement.

    A single person who wants a modest retirement needs an income of about £23,300* a year in today's money after tax. This should allow a standard of living where you're more financially secure and have some flexibility. You could enjoy a two-week holiday in Europe every year and have a relatively new car every 10 years.

    If you want to target a more comfortable retirement this figure rises to £37,300* each year after tax. This should give you more financial freedom. Some luxuries could include a couple of holidays abroad and spending nearly an additional 50% more on clothing and footwear every year.

    Knowing the type of retirement you’d like allows you to plan for the future. You can then use our pension calculator to check if you’re on track.

    *Retirement Living Standards 2022, PLSA. Figures are based on a single person living outside London. You may have other costs depending on your personal circumstances such as rent or social care costs.

    Why it pays to start contributing to your pension early

    It’s never too late to start contributing to your pension. But the sooner you start, the better.

    Below we look at how your potential pre-tax income in retirement changes depending on when you start and how much you pay in.

    Starting at 25 years old:

    Salary invested each year Est. pension value Est. annual income (before tax)
    3% £126,000 £18,900
    6% £188,000 £21,000
    9% £251,000 £23,200
    12% £314,000 £25,300
    15% £377,000 £27,500

    Starting at 30 years old:

    Salary invested each year Est. pension value Est. annual income (before tax)
    3% £105,000 £17,500
    6% £157,000 £19,400
    9% £209,000 £21,200
    12% £261,000 £23,000
    15% £314,000 £24,800

    Starting at 35 years old:

    Salary invested each year Est. pension value Est. annual income (before tax)
    3% £85,600 £16,300
    6% £128,000 £17,800
    9% £171,000 £19,300
    12% £214,000 £20,800
    15% £257,000 £22,300

    We’ve assumed: you don’t have an existing pension fund, you work continuously until the age of 68, earning £30,000 a year with wage inflation of 3% each year, your employer is contributing 3%, annual investment growth rate is 5%, annual charges are 1.5%, you qualify for a full new State Pension and you will take 25% of your pension as a tax free lump sum. We’ve also assumed price inflation is 2% per annum and that the income (other than the assumed full State Pension) is based on a single life annuity with no increases or guarantee period.

    Figures are an illustration. The value of your pension and the income available when you retire could be different and will depend on several factors including your investment performance and the retirement options you choose.

    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.

    Try our pension calculator

    Government and employer pension contributions

    Remember, not all the money in your pension needs to come from you.

    Pension Auto Enrolment means that if you work in the UK, are aged between 22 and State Pension age and earn over £10,000 a year, by law your employer must contribute the equivalent of at least 3% of any qualifying earnings to your pension each year when you contribute 5%. Many employers will pay in more and some may offer contribution matching. This means they’ll match what you pay in, up to a certain limit. You should contact your employer to find out your options.

    Personal pension contributions also benefit from tax relief. No matter how much tax you pay, the government will always add basic-rate tax relief to the amount you pay into your pension. You just need to be under 75 and resident in the UK for tax purposes. For example, say you wanted to add £5,000 into your pension, you’d only need to pay in £4,000 because you’d get £1,000 in tax relief from the government, bringing your overall contribution up to £5,000.

    If you pay tax at a higher rate, you can claim even more tax relief through your tax return.

    You should ensure that you don’t contribute more than 100% of your earnings after tax relief has been received, or £3,600 each tax year if this is greater. There is also an annual allowance (£60,000 for most people) which limits what you can pay in.

    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 pension tax relief works

    Try our pension tax relief calculator

    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.

    Our 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, or want to learn how to get ahead, check out our pensions page.

    You can also find out more about the HL SIPP, a personal pension designed for investors happy to make their own investment decisions. But remember, the HL SIPP shouldn’t be used in place of an employer pension as it could result in you losing your employer’s ongoing contributions.

    Pension contributions for the self-employed

    If you work for yourself, it’s even more important to pay attention to your pension than if you were employed. There’s no-one to choose a pension scheme for you, and no employer to make payments on your behalf. Meaning saving for retirement falls entirely on your shoulders.

    Because you won’t have an employer contributing, you might need to pay in more yourself to achieve your target income in retirement.

    Explore the self-employed pension page

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