MoneyMagpie Editor and financial expert Vicky Parry warns readers they need to start saving more than they expected to afford retirement
Pensions are a part of life – but a part many of us don’t pay much attention to until it’s too late.
The state pension isn’t enough to live on for most people, and the rise in eligible age means many won’t be able to access state pension support until they are 68 or older.
Without understanding pensions now, many are at risk of leaving themselves in financial difficulty as they enter retirement.
Working out how much you need to save depends a lot on your current circumstances and future goals. There are also different ways you can save for your pension fund.
How much pension do I need?
The Retirement Living Standards suggests the bare minimum a single person needs right now is £13,400 a year, while a couple needs £21,600.
That is to cover basic needs and nothing more. To live comfortably, this rises to £31,700 for single people and £43,900 for a couple.
For those hoping for a more lavish retirement, a minimum of £43,900 for one person or £60,600 a couple is retired.
But these figures are for living standards right now. Anyone looking to retire in ten, twenty, or thirty years will need to account for considerably more to cover for inflation.
These figures also assume a state pension (currently £11,973 per year), meaning some people would need to find only a couple of thousand per year to meet basic needs.
However, the future of the state pension is always uncertain, due to the nature of such a long-term benefit. Nobody knows what it might look like in a couple of decades, especially with changing welfare demands and shifting political landscapes.
They also can’t predict how long they might live, which will impact how far a pension fund stretches.
How much should I save every year into my pension?
Your aim should be to retire with a pension fund at least ten times that of your final working salary, as a rough guide.
The Retirement Living Standards suggest a pot of £800,000 would provide a comfortable pension that does not rely on state pension income. This can be achieved with long-term investment in your pension: the sooner you start paying in, the more time your money has to grow.
The older you are, the higher a percentage you should be putting into your pension. By your forties, you should be putting at least 20% of your monthly income aside for your pension, ideally 25% or more if you have not been paying in previously.
You can use the MoneyHelper pension calculator to find out how much your pension should be based on your circumstances and retirement goals, to give a figure to aim towards.
The workplace pension
The first step everyone should take is make sure they are enrolled in their workplace pension scheme if they are eligible. Opting out of this scheme puts more cash in your pocket in the immediate month but puts future-you at a huge disadvantage.
That’s because you’re missing out on free money towards your pension. Your employer must contribute at least 3% of your salary to your pension fund. That’s on top of your salary, so it’s like a pay rise. You must pay at least 5% but can choose a higher level if you prefer; there can be some tax advantages to doing this for some people, too.
As well as free money from your employer, the Government tops up with tax relief, which is more free cash in your pension pot.
So, a workplace pension contribution from you of £40 a month will mean an extra £30 from your employer and £10 of tax relief, making the total contribution £80 into your fund. You’re doubling your pension fund without it costing you anything extra.
Learn more about pension investment options
One reason people avoid learning about pensions is because they seem complicated. However, it is something we will all rely on as we get older, and the longer someone leaves pension investing, the harder it will be to build a viable pension pot to retire on.
The MoneyHelper website is a good first place to start, and there are plenty of books about pensions that can delve deeper into the nitty-gritty for beginners. The Your Pension website by the Government will also help point you towards more resources.
It’s also worth considering alternative pension investment options rather than relying on only having an invested pension fund. For example, some people might find a Lifetime ISA is a good plan alongside their pension fund for their retirement.
The maximum that can be paid in each year is £4,000, which the Government tops-up with a 25% bonus to take it to £5,000. You can open an account between the ages 18-39, and pay in until the age of 50. But you can’t touch the funds until age 60, meaning your money has a whole decade to grow before you can access it.
The advantage of a LISA is that it is a tax-free lump sum that can be accessed any time after the age of 60, without the same income restrictions and taxes from pension funds. But, it can affect things like your eligibility for means-tested benefits as it counts as savings, so it might not suit everyone.
Anything is better than nothing
It can be hard to sacrifice 5% or more of your monthly income to your pension at a time when bills are rising month-on-month.
However, the sooner you pay into a pension, the longer that money has to grow and it will do so more efficiently due to compound interest.
That means the interest you earn on the original contribution is reinvested. So, if you earned £100 interest in one year, that is an extra £100 in the pot that you didn’t have to earn through work. And that £100 then grows, say to £150. And that £150 is reinvested so the following year it is worth £200, and so on (figures for illustration only).
This means a £100 contribution now is worth more than a £100 in the future, so you have to pay less into your pension fund overall when you start earlier compared to later.
If you don’t have £100, start with £10. Paying in a tenner a month to your pension nets £120 invested in a year, which will then grow year on year. Small steps now will make a huge difference to your retirement finances.
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