How Much Should You Save Towards Your Pension?
We hear of it happening time and again! People have grand ambitions for their retirement income but underestimate how much they needed to save to get there. It’s why the mantra of financial advisers usually goes along the line of ‘plan early!’
And it’s true! The success of many a happy and fulfilled retirement has been down to careful planning well in advance. It comes as the reward for thinking ahead, for factoring in all those things you might want to achieve, and for thinking practically about what can be done to allow it to pan out as you hope.
The underpinning question behind every step is, of course, the time-old question ‘how much should you be saving?’ And that’s why many people choose to seek the help of a financial planner. It takes a lot of confidence to trust yourself to get something so monumental to your future happiness right. So, the objectivity of a trusted third party, who does it for a living, can offer great reassurance and peace of mind.
First Things First…
Before we can get to the hub of ‘how much you should be saving’ for your retirement, it’s important to scope your situation. That means assessing your starting point. List together all of your pots of money, or any other assets you might have, and what type of pension you have in place.
For most of us, our pensions will play a pivotal role in any retirement income we have. So, when planning ahead, you will need to establish what kind of pensions you have. Generally, there are two main types:
Defined benefit schemes
These plans deliver a secure income in retirement. The benefits paid will be linked to your time with the sponsoring employer, your salary and the scheme’s ‘accrual’ rate. If you are still an active member you’ll probably need to contribute each month too, putting in an agreed amount.
Defined contribution schemes
These pensions build up a ‘pot’ using your contributions and your employer’s contributions (if applicable) plus investment returns. This pot of money can then be accessed to fund your retirement when the time comes.
If you have a defined benefit scheme, you need to save as much as your employer says. But with a defined contribution scheme, the onus is on you to deliver the money you need in retirement. The more you pay in, the more you will get. So, while paying in the bare minimum while you’re working may sound like a good idea, it’s nearly always better to pay as much as you can afford (up to allowances) to ensure you have enough saved up when the times comes.
How much retirement income will I need?
In retirement, your outgoings will likely be lower. For instance, most people tend to be mortgage-free and no longer supporting children by the time they retire. A google search suggested a vague rule that someone currently aged 40 would need around 50% of their current income to have the same standard of living in retirement. We can’t say that we have heard this rule, but we do believe that you need to think about how you want your retirement to look, and importantly, what that is going to cost.
You should also remember that you will be receiving the state pension. Under the new flat-rate scheme this is worth £175.20 per week (£9,110 per year). So, someone targeting a retirement income of £23,000 would need to contribute £14,000 from their own means.
How much should I be saving?
Now to address the big question. The amount you need to save for your retirement income depends on what you are planning to do. But, crucially, the amount this can amass too will be dependent on your age.
For instance, putting 12% of your salary towards your pension might be enough if you start doing so in your 20s. But the same will not be true if you leave it until you’re 40! In fact, in that scenario, you might need to pay in closer to 20% to get the same level of income. (Remember the mantra… ‘plan early!’)
While such tricks can give you a ball-park figure, it’s important to remember it’s just that. Variations in salaries and personal circumstances can impact the amount you need to contribute significantly – so it’s always worth seeking more profound insights into your finances.
You might try one of the many online pension calculators to double-check your finding. These will allow you to play around with the numbers to help you chart out what is and isn’t practical.
But, do bear in mind that such tools do not take the place of speaking to a reputable, independent financial adviser about your retirement income! They will have the knowledge and experience to help you get both a clear view of your current situation and the changes you need to make to get you on the right path towards your goals!
Want to Speak to a Financial Adviser?
As always, if you would like to speak to one of our reputable, independent financial advisers, please do call us on 01243 767 469. Alternatively, you can email us from our contact page, and an adviser will be in touch.
Written by Ian Barnett
Ian is an experienced Chartered Financial Planner as well as being a Fellow of the Personal Finance Society, with over 25 years’ experience in the financial services industry. With a broad range of client experience and expertise, Ian specialises in financial matters from Pre-Retirement Planning to Inheritance Tax Planning and all points in between.