How to ensure your pension contributions provide the retirement you want
How do you see your retirement when you finish work? Is it one filled with holidays and weekends away, or plenty of time relaxing in the garden and spending time with family? Whichever lifestyle you want, an article by MoneyAge may provide food for thought for many pension savers.
It reports that 40% of workers in the UK have little or no idea how much they need to save in order to enjoy the retirement they want. The article also revealed that 37% of people “weren’t confident” that their pension pot would provide enough income to support the lifestyle they would like.
The latter dovetails into research featured in a PensionsAge article, which found that 86% of pension savers are not on track to achieve the retirement lifestyle they want. This highlights the importance of understanding how much your pension pot is worth, and how likely it is to provide the standard of living you would want when you finish work.
This is something a financial planner can help you understand, as well as your options if it turns out your pension is not on track to provide the retirement lifestyle you hoped for. Read on to discover how you could ensure that you are contributing enough into your pension pot to enjoy the retirement of your dreams.
The rule of thumb about pension contributions
While this should only ever be used as a very general guide, the Times explains that there is a “rule of thumb” you could use to work out how much money you should be placing into your pension. Simply divide the age at which you started paying into your pension by two, and that is the percentage of your pre-tax salary you should be contributing into your retirement fund.
For example, if you start contributing at the age of 30, you should be placing 15% of your income into your pension pot until you retire. If you start contributing at 40, this rises to 20%, so as you can see, the earlier you start the less you will need to place into your pension.
Remember, if your contributions are going into a workplace pension scheme, they will be boosted by your employer’s contribution, which is typically 3% of your salary, but often more. Additionally, you will typically receive tax relief on your contributions.
This could mean that every £100 contributed into the scheme only costs you £80 if you are a basic-rate taxpayer, or just £60 if you are a higher-rate taxpayer. Additional-rate taxpayers may only pay £55.
While you are allowed to put any amount into a pension, the amount of money that receives tax relief is limited by your Annual Allowance. This is usually £40,000 or the amount you earn, whichever is the lower, and high earners could have their allowance reduced to £4,000.
The amount you contribute depends on the retirement lifestyle you want
While the rule of thumb may provide a very general guide, in reality the contributions you need to make depends on several factors. This includes whether you have stopped making contributions to your pension at any point, and the standard of living you want in retirement.
If you want expensive holidays and to eat out regularly, you will need to contribute significantly more to your pension than if you do not. To demonstrate this, you might want to consider the following example that was featured in FTAdviser in August 2022.
It revealed research by Pension Bee that showed an “average retiree” would now need an annual income of £21,000 to maintain a comfortable lifestyle after 2022’s soaring inflation. Inflation measures the rising cost of goods and services over time.
This means you would need a pension pot valued at £420,000, assuming an annual growth rate of 5% and 0.5% in fees.
If, on the other hand, you’re hoping to maintain a “luxurious lifestyle”, Pension Bee calculates you would need an income of £34,000 a year. This means that your pension pot will need to be valued at £680,000.
Put another way, you would need to boost your pension pot by an additional £260,000! All of the calculations were based on inflation averaging 10% in 2022 and 2023, 5% until 2028 and 2.5% for the next 13 years.
This is why working with a financial planner is so important, as they will help you to understand how much income you will need to achieve the retirement lifestyle you want.
Furthermore, they will explain whether your pension pot is likely to be able to provide the income you need. When you consider another FTAdviser article reveals that a third of Britons overestimate the income their pension pot could provide, you can see that working with a financial planner could be a shrewd idea.
If it turns out that your pension will not provide the income you’d hoped for, a financial planner can provide options that could boost your retirement fund to where it needs to be.
Get in touch
If you would like to discuss or confirm the value of your pension, whether it could provide the lifestyle you hope for in retirement, and ways you might be able to boost it, please contact us.
Either email us on firstname.lastname@example.org or call 01234 713131.
This blog is for general information only, does not constitute advice and is aimed at retail clients only. Please do not act based on anything you might read in this article.
All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.