How much should you pay into your pension in order to enjoy a comfortable retirement?
It is one of those questions that has no definitive answer because it depends on imponderables such as earnings, aspirations, and lifestyle.
Worse, many people cheat themselves.
They skate over just how long their pension pot might have to last – men aged 65 live until 87 on average, 89 for women.
And they conjure up a set of expectations which deep down they must know are pipe dreams.
For example, Times Money Mentor, quoting Fidelity, notes how the average woman wants an income of £28,000 a year over an expected retirement of 19 years. When taking inflation, the state pension and tax into account, it estimates you would need almost £480,000 in your pension pot. By comparison, most men wanted £30,500 a year over 18 years. To meet this Fidelity said they would need a pension pot of almost £508,000.
Contrast this with figures from Hargreaves Lansdown on the realistic outcome. Starting at 35, someone on £30,000 a year, working until they are 68, and investing an unlikely 15 per cent of salary might build a pension pot (post their tax-free 25%) of just £257,000, all dependent of course on investment performance and retirement options chosen.
The two sets of figures don’t add up, especially as, with the cost of living increasing, people wanting to retire earlier and living longer, bigger pension pots are required and/or other assets to sustain income levels.
Neither do most of us come close on the old adage – take the age you start a pension and halve it. Then aim to put this % of your pre-tax salary into your pension each year until you retire. Therefore, someone starting aged 32 should contribute 16% of their salary for the rest of their working life.
Money Saving Expert commented: “Don’t worry, almost nobody reaches this amount.”
Back to basics.
First, the new state pension provides a maximum pay-out of £221.20 a week, or £11,502 a year. You will need 35 years of national insurance contributions to qualify. Do your utmost to make sure you are entitled to the full amount and, if you look likely to fall short, purchase back years you may have missed.
Second, Pension Auto Enrolment means that, subject to age rules, if you earn over £10,000 a year, by law your employer must contribute the equivalent of at least three per cent of any qualifying earnings to your pension each year while you inject five per cent. Some employers will pay in more and may offer contribution matching. Hence, up the ante if you can.
Third, personal pension contributions attract tax relief. Make the most of it. Basic-rate taxpayers benefit from 20%, higher-rate taxpayers get 40% and for additional-rate taxpayers it’s 45%, though there’s speculation a Labour government might not be so generous.
If you earn £3,600 or less, you can put £2,880 in to a pension each year and it’ll be made up to £3,600 with tax relief. Those between £3,601 and £12,570 can place 100% of their earnings into a pension, and in most cases it will be eligible for a 20% tax relief top-up. Taxpayers earning £260,000 or less can put 100% of earnings or £60,000 (whichever’s lower) into their pension pot and still get tax relief on the lot. For those on more than £260,000, their annual limit lowers by £1 for every £2 of income that goes over the limit.
Remember too the golden rule – the more you can save and the earlier you start, the better will be your retirement prospects.