Deciding how much to save into your pension
When you’re thinking about how much to put into your pension each month, it’s useful to think about several things, including:
- How much money have you already saved into your pension?
- When do you hope to retire, and how many working years do you have left?
- Are you likely to increase or decrease your pension contributions in the future?
- How much do you expect your investments to grow between now and your retirement?
- How much will your employer contribute to your pension, and do they offer contribution matching?
Considering these factors should help you figure out how much you need to save. Our pension calculator can help you figure this out, taking into account factors like your target retirement age and income.
Workplace and government pension contributions
As a rough guide, it’s sometimes suggested that money equivalent to around 15% of your annual salary should be tucked away into your pension. Not all of this money comes from you. Remember that if you’re paying into a workplace pension, your employer will add contributions to your pension too. Under Auto-Enrolment, the minimum employee contribution is currently set at 3% of your ‘qualifying earnings’, while the minimum amount your employer has to pay is 2%. These contribution levels are set to rise to 5% and 3% respectively by 2019.
You also get government contributions, in the form of tax relief. The amount of tax relief you receive depends on your income tax bracket, so you get a tax top up of 25% if you’re a basic rate taxpayer. This means that for every £100 you put into your pension, the government adds £25, bringing your total pension contribution to £125. You get tax relief at 40% if you’re a higher rate taxpayer and at 45% if you’re an additional rate taxpayer.
Pension contribution limits
When you’re deciding how much to pay into your pension it’s important to bear in mind the pension contribution limits. Few people are at risk of exceeding the limit, but if you do then you’ll be hit with hefty tax charges.
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.
For very high earners, a new tapered pension contribution has been introduced. This affects people who earn over £150,000 per year, and we’ve explained more about it on our pension contribution page.
If you don’t have an income or you earn less than £3,600 per year, your annual pension contribution limit is £3,600, including 20% tax relief.
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.
If you have a pension that you can manage online, you can do this more easily. With PensionBee, you can log into your BeeHive anywhere from any device to check your balance and see whether you’re on target to reach your retirement saving goal.
Sign up to PensionBee and take control of your pension saving.
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: 30-09-2018