How much should I pay into my pension?
There are a lots of factors to consider but a very rough amount that’s sometimes suggested is that you should save around 15% of your gross income (your total pre-tax income) per year during your working life.
When you’re deciding on your level of pension contributions, you should think about the following:
- The balance of any existing pension(s)
- Number of years left working
- Your planned retirement age
- Your ideal retirement income
You may be eligible for some level of state pension, so remember to take this into account too when you’re calculating how much you need to save for retirement.
Of course, your level of pension contributions largely depends on how much you can afford to save. If you’ve got some money left over each month then your pension is a good place to put it, especially because the tax relief makes a pension more attractive than other saving products. Also, new pension freedom rules mean you’ve got more options for what to do with your pension pot once you reach 55 (57 from 2028).
It’s also a good idea to increase your pension contributions when your salary increases.
What level of pension contributions do most people make?
The most recent figures from the government showed that around 5.5 million people contributed to a personal pension in 2012-2013 and that the average annual contribution that year was £3,510 (approx. £292.50 per month)*. This is the gross amount contributed, meaning it includes employer contributions and tax relief.
The average annual contribution differed markedly between the genders and age brackets, and this is only the average for one year.
Tax relief on pension contributions
For 2016/17 you can get tax relief on your pension contributions up to £40,000 or 100% of your salary (whichever is lower).
You usually get 25% tax top up as standard. As an example, if you’re a basic rate tax payer and you pay £8,000 into your pension fund, HMRC effectively adds another £2,000, giving you a £10,000 total. If you are contributing to a PensionBee pension, PensionBee will claim this tax relief on your behalf.
If you’re a higher rate taxpayer you can claim another 20% through your tax return, rising to 25% for those who pay the top rate of tax. If you are a non-earner or earn less than £3,600 annually, you can contribute up to £2,880, so that once tax relief is added your total annual contribution is £3,600.
Elsewhere, from 2016/2017 a new tapered annual allowance has come into force (designed to restrict pensions tax relief) which will mainly affect individuals with an income of over £150,000. See the table below for how this new legislation works:
|Earnings||New annual allowance|
|Up to £150,000||£40,000|
Am I eligible for tax relief?
You’re eligible to receive tax-relief from the government so long as you’re under the age of 75. However, you must fit into one of the following categories:
- You’ve been a UK resident for tax purposes at some point during the last five tax years
- You have relevant UK earnings subject to income tax
- You have a spouse/civil partner with general earnings from overseas Crown employment subject to UK tax
Relevant UK earnings are normally your total taxable earnings from UK employment and include:
- Salary from employment
- Profit from self-employment
Relevant UK earnings generally do not include investment income.
How to make contributions to your personal pension
Most modern providers will allow you to make regular contributions by setting up a regular bank transfer with your bank. You can also make one-off payments when you want to add a bit extra but not all pension providers will allow it. At PensionBee, you can make one-off contributions or setup regular payments here.
PensionBee combines your old pensions into a shiny new plan that you can manage online. Find out more about PensionBee.
*Source: Personal Pensions Statistics
Last edited: 09-05-2018