With the UK pension freedom legislation introduced in 2015, pensions have become one of the most efficient and flexible ways of saving to fund your retirement. However, research1 reveals that one in six Britons who are within sight of their retirement still have no savings.
It is worrying statistic that so many are still unprepared for retirement. A pension pot can form an essential part of your retirement planning and the sooner you start to contribute to it, the better.
While any amount is a good start and will help towards your desired lifestyle in retirement, the reality is that it won’t be enough unless you carefully plan now to achieve the life you wish to live in retirement.
Factors to consider
When you’re thinking about your retirement and how much you need to save, consider what you can actually afford but don’t lose sight of how far off your retirement is. The question is often not at what age you want to retire but at what income.
It’s useful to think about several things, including:
– How much you already have saved into your pension
– The number of years you have left working before retirement
– How much can you afford to contribute to your pension with your other financial commitments
– Are you expecting to increase or decrease your pension contributions in the future
– Do you have investments, and will they grow between now and your retirement?
– How much will your employer contribute to your pension
How much is enough?
Unfortunately, there is a usually a large gap between what most people think they need to live on in retirement and how much their pension pot will deliver. Research has shown that those who don’t start saving until 35 will need to save around £440 each month to build a healthy pension pot (around £230,000) at retirement2.
The most common rationale to making sure you have a ‘good’ pension is to halve your age from when you started saving and put that number as a percentage into your pension each month. For example, if you start at age 30 it would be 15%, whereas if you start at 40 it is 20 percent.
The key is to put as much into a pension pot as you can and don’t leave it too late to start saving, the earlier you start the easier it will be.
Don’t forget there are limits to your pension contributions
When you’re deciding how much to pay into your pension, it’s important to bear in mind the pension contribution limits. If you exceed the limit, you’ll be hit with a hefty tax charge.
For most savers, the current pension contribution limit is 100% of your income, with a cap of £40,000. So if you earn £26,000 a year, you can save up to £26,000 into your pension in one year and still receive tax relief. If you earn £50,000 a year, you can save up to £40,000 into your pension and still benefit from tax relief.
In the 2015 Summer Budget, a ‘tapered annual allowance’ was introduced for high earners to give them more scope to make higher pension contributions and enjoy additional income tax relief. This currently affects those who earn over £200,000 per year. Those earning over this threshold need to be careful to avoid a hefty tax bill later down the line.
Reviewing your pension saving
It’s important to keep an eye on your pension saving and make sure you’re on track to save enough for your retirement. It’s a good idea to regularly review your contribution levels, and to increase them if you can afford to, for example following a pay rise. Also, many companies offer to match an employee’s contributions – for example, if you put in 8% they will also put in 8%.
Don’t forget the cost of pension saving is also brought down by tax relief. Basic-rate taxpayers contributing £100 into their pension will only actually cost them £80. Higher-rate taxpayers can claim additional tax relief, so every £100 would only cost them £60.
What should you do next?
With a complex array of pension legislation and products available, it is more important than ever to seek professional and independent advice to ensure you are making the right decisions for your future. Contact our wealth management team (01254 679131 / firstname.lastname@example.org) who will happily arrange a meeting at no cost to help you achieve more from your pension and long term financial plans.
1 Survey by Unbiased and Opinium of 2,000 non-retired UK adults, conducted June-July 2020.
2 Scottish Widows’ 2017 Retirement Report