If you have a defined contribution pension - the most common type of pension nowadays - the value of your pension on retirement depends on how much you’ve paid into your pension, the performance of your investments, and the fees taken by your pension provider.
This means that the amount you save into your pension is really important, as it will determine the level of income you can expect to receive when you retire.
What does a good pension pot look like?
It’s really tricky to say what a ‘good pension pot’ looks like, as there are lots of different factors to take into account. It depends, for example, on how old you are, what kind of pension you have, what age you hope to retire, and how much you think you’ll need when you stop working.
Figures from the Department for Work & Pensions show that the average pensioner receives £17,200 a year from their pensions (not including the State Pension), after taxes and housing costs. We estimate that a healthy 65-year old might need a pension pot worth £280,000 to take out a 25% tax free lump sum and generate an annual income of £17,200 for 15 years of retirement. (source: Pension Wise)
How much to put into your pension pot
When you’re deciding what level of pension contributions to make, as well as thinking about the size of pension pot you’re trying to accumulate, you need to consider how much you can afford to put into your pension, how much you’ve saved already, your level of employer contributions, and what other sources of retirement income you expect to have.
It’s sometimes suggested that you should try to save around 15% of your pre-tax income into your pension every year during your working life.
If you’re struggling to see how you can afford to pay into a pension, check out our article on pension saving for a tight budget. Remember that your pension contributions are boosted by government contributions in the form of tax relief, and your employer may pay into your pension too.
The PensionBee pension calculator
It can be hard to figure out how much you need to save for retirement, so we’ve built a handy online pension calculator that can make things a little clearer.
You can use the calculator to set a target retirement age and income. Just tell us the amount of money you’ve saved so far and your level of contributions, and we’ll show you whether you’re on track to save enough to reach your target pension income, or whether you may need to increase your contributions.
The calculator makes several assumptions, for example that as you get older you’ll increase your level of contributions, and that your investments will grow at a certain rate. Of course, the calculator is just a tool and it can only make estimates: remember that the value of your investments can go up as well as down, and there are lots of factors that could affect the value of your pension pot at retirement.
Join PensionBee now.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 07-07-2021