Knowing when to start a pension and how much to save are two common dilemmas savers face. If recent figures are anything to go by, it’s clear that this indecision is having a detrimental effect on our finances.
As a nation we’re living longer but aren’t saving enough for our retirement, which is forcing our aging population to work for longer than previous generations. Data from the Office for National Statistics (ONS) shows that the number of under-65s in retirement fell from nearly 1.6 million in 2011 to under 1.2 million at the start of 2018 .
Last year, research by the FCA found that as many as 15 million Brits weren’t saving for their retirement and may have to work into their 70s or 80s to maintain their quality of life .
Whatever your age, it’s crucial to start thinking about how much you’ll need to ensure a comfortable retirement in later life. When you’re deciding how much to save into your pension, you’ll need to consider several factors including how much you can afford, how long you’ve got until you retire and your desired retirement income.
It’s estimated that you’ll need around 70% of your average earnings to maintain your lifestyle once retired . Here’s a breakdown of how much you should be saving in a pension, depending on the decade you start.
- In your 20s
If you’re in your 20s you’ll have many things competing for your money and your attention. Yet while retirement can feel like a long way off and something you can put off until later, it’s important to start thinking about your pension as early as possible.
There are many benefits to saving sooner rather than later, chief among them being that the earlier you start meaningfully saving for retirement, the more time your pension will have to grow, and the less you’ll need to save.
Albert Einstein described compound interest as “the eighth wonder of the world” because it’s the interest that you earn on the interest that’s already built up on your savings. As it accumulates over time, compound interest can help you can turn a small pension into a large pension over several decades.
According to calculations by Scottish Widows, you’ll need to save £293 a month from your mid-20s to secure an annual income of £23,000 in retirement. This is based on a salary of £30,000 a year, with employer contributions of 4%, plus State Pension .
- In your 30s
Pension saving can become more challenging in your 30s as often this is a decade when life’s biggest, and most expensive moments can occur. Whether that’s buying a home, getting married or having a child, disposable income can sometimes be hard to come by in your 30s which often means only making the minimum payments into your pension.
If you’re in your mid-30s and haven’t started saving, Scottish Widows estimates you’ll need to save £443 a month to secure an annual income of £23,000 in retirement. This is based on a salary of £30,000 a year, with employer contributions of 4%, plus State Pension .
- In your 40s
Your 40s are a crucial decade when it comes to pension saving, especially if you haven’t started planning yet. You could be just 10-15 years away from withdrawing your pension so you’ll need to prioritise saving. In theory, your earning potential should be nearing its peak and the majority of the expenses that come with your 30s could soon be behind you, enabling you to save more.
If you’re in your mid-40s and are starting a pension from scratch, Scottish Widows estimates you’ll need to save £724 a month to secure an annual income of £23,000 in retirement. This is based on a salary of £30,000 a year, with employer contributions of 4%, plus State Pension .
- In your 50s
Many see their 50s as crunch time, and aim to save as much as possible in the first half of the decade, before they potentially access their pension from the age of 55. Children should be less financially demanding by now and you may be close to paying off your mortgage, which will help you save more now and you’ll be able to survive on less in retirement.
If you wait until your mid-50s to start a pension, Scottish Widows estimates you’ll need to save a whopping £1,445 a month to secure an annual income of £23,000 in retirement. This is based on a salary of £30,000 a year, with employer contributions of 4%, plus State Pension .
The benefits of pension saving
Over the years the government has introduced several measures to encourage Brits to build their retirement savings and there are two key ways you can maximise your pension contributions.
Following the full roll-out of Auto-Enrolment earlier this year, all employers must now automatically enrol all of their eligible staff in a workplace pension scheme. As an employee you have to contribute a minimum of 3% of your annual earnings to your pension and your employer must contribute 2%. By April 2019 minimum contributions will rise to 5% for employees and 3% for employers.
Most UK taxpayers receive tax relief on their pension contributions, which means that the government adds money to your pension each time you make a payment. Basic rate taxpayers get a 20% tax top up automatically, while higher rate and additional rate taxpayers can claim an additional 20% and 25% respectively through their tax returns. This tax year you can contribute up to £40,000 to your pension and receive tax relief.
Why the State Pension isn’t enough
At present you won’t be able to access the State Pension until the age of 65, however this will increase to 66 by 2020 and 67 by 2028. It’s estimated that due to increasing life expectancies, people in their 20s today won’t be able to draw their State Pension until at least 70 years of age .
Anyone planning to fall back on the State Pension in retirement will be forced to work until their late-60s and then possibly longer, as the maximum State Pension you can receive is currently just £164.35 per week or £8,546.20 a year.
Start saving today
While it’s never too late to start saving, it does become more difficult the longer you leave it. Meaningfully contributing to your personal or workplace pensions on a regular basis and whenever you come into extra money, such as a pay rise or bonus, will put you in a much stronger financial position when the time comes to draw your pension.