How Much to Save into a Pension.
A report issued way back in June 2011 by Scottish Widows suggested that
- 49% of the population are not saving enough for their retirement and
- 20% of people are not saving anything at all for retirement
These were are still are worrying figures. None of us wish to retire in poverty but many will do because we do not plan for retirement or we prioritise our mobile telephone or television package over our financial security. The Government is now doing its best to make pension saving more attractive and flexible to savers with new flexible pension rules.
So, how much should you pay into a pension?
You should always pay in as much as you can afford, don’t overstretch yourself so if things become tight you can make cutbacks, look to build on that through the years.
If you are looking to plan on a certain amount to retire on a certain amount it is probably a good thing to know how much a pension costs first. When you come to retirement you will have built a pension fund, that fund buys you an annuity. An annuity gives you an income for the rest of your life and it’s good to think of it like interest rates.
Here are some quick figures to show you. An inflation protected pension where you would get pay rises every year. You would need £300,000 in your pension pot for a £10,000 pension income, this is based on current annuity and interest rates both of which are quite low.
To get there we would suggest a 20 year old would need to be saving about £100 per month for every £10,000 a year pension income. This goes up the longer you leave it, a 30 year old would need to save £150 per month, a 50 year old would need to save £200 per month and a 50 year old would need to save £300 per month. If you have left it until age 50 you have left it a long time to start planning.
£10,000 pa inflation linked pension costs £300,000
- Age 20 save £100pm
- Age 30 save £150pm
- Age 40 save £200pm
- Age 50 save £300pm
If you wanted to retire on a £20,000 a year pension and you’re aged 20, then you need to double that up and save and estimated £200 a month. Leaving it longer will see that amount increase quite significantly. If you have left a long time until aged 50 to start planning then you are looking at saving about £600 for the same £20,00 a year.
This comes down to one thing, saving sooner is key, planning for your future is important. Speaking to an adviser and planning to start saving sooner rather than later would allow you to save less per month but allowing yourself to retire with an decent amount at age 65.
Remind yourself again on these figures. For a £10,000 pa pension, we suggest
20 year olds should save at least £100 pm and increase payments each year with inflation
30 year olds should save at least £150 pm and increase payments each year with inflation
40 year olds should save at least £200 pm and increase payments each year with inflation
50 year olds should save at least £500 pm and increase payments each year with inflation
So, if you are 30 years old and want a pension of £20,000 pa, you really should be saving £300 per month as a minimum now. These figures are only for guidance and we hope they help you think about how much to save and when you should start saving.
Is it worth it? Pension Tax Relief
These are questions we are asked every day and ones that are difficult to give anything other than hard fact, reality check answers. Pensions are expensive and given that people are living an additional 10-15 years in retirement than we were 60 years ago, it is why pensions are in the news so often today.
Tax relief: The government is desperate for us to save in pensions as they cannot afford for us to be a financial burden on society in our retirement years. Therefore, for every £100 you save, the government will add £25 in tax relief making your payment up to £125, making a pension one of the best investment returns you can get today.
- Basic Rate Tax Payer - 20% Relief. You pay in £100 and pension company automatically adds £25 (20% for tax relief)
- Higher Rate Tax Payer - 40% Tax Relief. You pay in £100 and pension company automatically adds £25 (20% for tax relief) and then via Self Assessment Tax Return - You declare pension contribution and you receive an additional 20% tax refund of £25 per £100. In short, there is £125 in your pension fund (and you have technically paid £75 - £100 paid in less £25 additional tax refund)
- Additional Rate Tax Payer - 45% Tax Relief. You pay in £100 and pension company automatically adds £25 (20% for tax relief) and then via Self Assessment Tax Return - You declare pension contribution and you receive an additional 25% tax refund of £31.25 per £100. In short, there is £125 in your pension fund (and you have paid £68.75 - £100 paid in less £31.25 additional tax refund)
But we must save more than just the minimum. To do this, we must understand how much a pension really costs.
The Cost of a Pension - How Much Is Your Company 'Final Salary Pension Worth?
Employers complain that employees do not value their pensions and we tended to agree until recently. Many public sector workers are planning to strike shortly over changes to their pensions. Whilst we have sympathy for both employers and strikers alike, the following may help you understand the costs involved in paying for the equivalent of a local government or a teacher’s pension.
Example: 65 year old Council Worker Earning £30,000 pa with a full pension entitlement of £20,000pa.
Annuity rate cost for a 65 male, inflation protected, with inflation increases and a 50% spouse pension = 3.48% (Source FCA Annuity Comparison Tables 22/06/2011).
Therefore, the cost of an inflation protected annuity on the open market to buy a pension of £20,000 pa, with inflation protection is £574,713.
A £20,000 per year pension costs nearly £600,000!
This is the real cost to the country given that there are over 6 million* public sector workers who mostly have “gold plated” pensions. Add to this another 8 million* people who are economically inactive in the UK, this is a total of 14 million people who are paid for by just over 21 million private sector workers. Most private sector workers do not have “gold plated” pensions nor death in service benefits nor income protection benefits. (*Source Office for National Statistics 15/06/2011)
These high costs are of course the reasons why the government is set on changing public sector pensions to reflect private sector trends and why unions are fighting to protect their members’ rights. YOU MUST SAVE ENOUGH IN YOUR PENSION.
Tips for Getting a Bigger Pension
- Talk to us to compare all pension plans
- Pay a fixed fee to arrange your pension and stop high % fee, % trail fee and no-advice % commission charges being deducted over the whole pension term
- Only start pension payments at a level you can afford, it is a waste of time if you have to stop payments in a couple of months or years
- Set pension payments to slightly increase each year.
- Set up a yearly review with us (Money MOT) to invest wisely in areas that are up and coming and to lock in the profit that you made in the last year. So many people do nothing and lose the growth they achieved in the previous year by not locking it in each year.
Speak to us today about making your pensions bigger.