PENSIONS

How we can help you get organised with your pensions?

  • Consolidating your pension plans, putting them under one roof, with a simple ‘dashboard’

  • Reducing ongoing charges which erode returns over the long term

  • Creating a transparent, cost-effective plan that will give you the confidence that your retirement plans are in the best possible shape

How much is enough?

One rule of thumb recommends you save up ten times your average working-life salary by the time you retire. So if your average salary is £30,000 you would aim for a pension pot of around £300,000.

Another approach is to save 12.5% of your monthly salary - if your annual salary is £30,000 you would save £312 a month; over 40 years at 4% growth this could build a pension portfolio in excess of £300,000.

With a workplace pension this is even more achievable, if your employer matches your contributions. You would only need to pay in £125 per month (5% of your salary) which your employer would double up to £250. Tax relief of 20 per cent then takes this up to the required £312.50.

Those are the quick ways to work out how much you should save. But for a clearer idea of how much pension pot you’ll need, use the following simple guide to retirement saving.

What’s my target income in retirement?

The first thing to work out is how much you might need as retirement income.

The '50-70' rule is a good rule of thumb - you aim for an annual income that is between 50 and 70 per cent of your working income. So if you earn £50,000 now, you will want to achieve somewhere between £25,000 and £35,000 a year.

If you want a more accurate figure, you’ll have to do a few sums.

Calculating your retirement income needs

For a more accurate figure, you’ll have to do a few sums. Follow the steps below to help your calculations

 

What extra money might I need in retirement?

In working out your target income, we’ve assumed your needs and spending stay roughly the same. In reality, that won’t be the case. You’ll want to indulge yourself now and then, and will continue to face one-off expenses. Additional costs might include:

  • Discretionary spending

  • Home repairs / improvements

  • Dental / medical expenses

  • Helping children financially

  • Saving for care costs in later life

It’s therefore sensible to aim for a safety margin when saving for retirement, rather that just the bare minimum. This might mean a higher income, or just a larger pension pot (this depends on how you choose to take your pension.

The cost of living may have increased significantly by the time you retire. Typically, the cost of living doubles every 25 years, so work out what it might be by the time you retire.

Age and longevity

A typical retirement age might be 65. You may wish to retire sooner, but you’ll need to factor this into your calculations (as it means less time saving and also more time living off your pension). If you retire later than 65, you may not need to save as much.

Lifespan is less easy to guess, but you can get a rough idea (based on your health and lifestyle) using a life expectancy calculator. Broadly, an average 40-year-old today who retires aged 65 could expect to live to 82 – meaning a 17-year retirement. Those who keep fit and have a healthier lifestyle could add 5 to 10 years to this. That’s good news for you, but it does mean you’ll need more savings.

final salary pensions

Some workplace pensions are a special type known as final salary or defined benefit. These provide a guaranteed income for life, and are generally very good things to have. If you have one, or think you might, find out how much it will pay you and when the payments will start (your ‘pensionable age’).

Add this figure to your state pension to keep a running total of your guaranteed income.

Now you can start to work out how much more income you might need from other pension pots.

 

Case Study

Mr ABC has no final salary pensions, and expects to receive the full new state pension from the age of 68. He is aiming for a retirement income of £25,000. From 68 onwards he’ll need to make up £16,454 a year from his private pensions. If he retires at 65, then for three years he’ll need to find the full £25,000 himself.

Assuming he lives to the age of 85, how big would his pension pot have to be to generate that kind of income?

Suppose he has saved a pot of £250,000. His financial adviser finds him a drawdown scheme which achieves a steady 4 per cent growth. He draws £25,000 a year for three years, followed by £16,454 for each subsequent year (once he starts receiving his state pension). Assuming nothing else changes, the pot will run out towards the end of the 20th year.

This could be almost spot-on as far as Mr ABC is concerned. However, this example depends on his pot growing by a steady 4 per cent. If growth is lower (particularly in the early years) or if he takes out more, his pot will run out much sooner. Furthermore, he may live to be a lot older than 85.

How much can I pay into my pension?

Up to now we’ve only asked ‘How much should I pay into my pension?’ – but the other big question, especially for higher earners, is how much you’re permitted to pay in.

There is an annual allowance (how much you can pay into your pension each year) and a lifetime allowance (how much you can pay into your pension in your lifetime) that both limit the amount you can save into pensions and still get tax relief. 

How much can I pay into my pension if unemployed?

Ordinarily, a person can’t pay more into pensions each year than they earn in salary. But what if you have no earnings, or earn very little? Fortunately, you can still pay in a reasonable amount and receive tax relief on it, provided you can find the money to do so (e.g. your spouse might give you the money, or you might have other savings).

If you earn less than £3,600 you can pay up to £2,880 a year into a personal pension (e.g. a stakeholder pension or a SIPP). This money benefits from tax relief to become £3,600 (and since you’re not actually paying tax, this is exceptionally good value). This is enough to build up a decent-sized pension pot – in 20 years you could have over £100,000, and in 30 you could have over £200,000.