As experienced financial advisers, one of the questions we are often asked is ‘how much should you pay into a pension? When it comes to retirement, it’s not a matter of whether you should invest, but rather how much. 

When it comes to how much you need to pay into a pension, our independent financial advisers have come across many formulas, and calculations. Some of them are useful and many of them are fundamentally flawed. 

The objective of this article is to help get to grips with how much you should pay into a pension based on your target income in later life, and your desired retirement age.

What is your target retirement income?

When considering how much you should pay into a pension, consider your target retirement income. If you are thinking about your target income for later life, first get an understanding of your target retirement age.

We often advise our clients to imagine what their retirement will look like.

Will you lead an active lifestyle?

Are you more likely to kick back and relax?

Are you looking to travel the world?

For many, retirement is a long holiday, enjoyed in the company of friends, family and spending time with loved ones. Alternatively, you may see it as a time to simply relax, and reflect on a long fruitful career.

In essence, retirement means stopping work altogether. By default this means no more monthly salary, quarterly bonuses and financial perks. Therefore, you need to assess how much income you are going to need to support you throughout the rest of your life.

Is your mortgage paid off?

How much will you need to clever the cost of gas, electricity, food and a yearly holiday?

These are just a couple of questions to consider.

Related reading: 10 retirement planning tips

How much should you pay into a pension? The 50 – 70 rule 

Whilst we can’t answer the above questions, you may wish to consider the 50 – 70 rule. This rule suggests you should plan to have 50-70% of your retirement income covered either via a pension, your savings or investment income.

To offer a working example, if you earn £100,000 per year, you should aim to have £50,000 – £70,000 of retirement income.

Other approaches to calculating your required retirement income

A more financially accurate approach to calculating your required retirement income is as follows:

  • Estimate your monthly expenditure
  • Aim to cover these costs easily
  • Have a surplus that allows you to enjoy your retirement

When armed with these facts, you will start to form an idea of how much you should pay into a pension.

Related reading: Should I invest in a pension?

What is your desired retirement age?

In this section of our short guide to how much you should pay into a pension, we focus on your desired retirement age. 

Currently, the state pension in the UK is 66. There are some planned and potential rises in future. They are:

  • Rising to 67 between 2026 and 2028 
  • A potential rise to 68 between 2037 and 2039

The UK government keeps this under review, therefore, there may be changes to this in the coming years.

Typically, pensions become available at age 55 with your personal retirement age anywhere between 55 and 75 years old.

Retiring early or later in life

Two key considerations when planning for your retirement is how much you will need to live on. Here are a couple of scenarios to consider: 

  • Early retirement could mean you have less time to accrue a sizeable pension pots to see you through later life
  • Retiring later in life could allow you more time to save and invest, but less time to enjoy retirement

The formula for how much should you pay into a pension

One of the simplest ways of working out how much you should pay into your pension is through the following formula: 

  • Take the age you first start paying into your pension and divide it by two
  • The resulting figure is the percentage of your pre-tax salary you should pay into your pension until you retire

A practical example

Let’s use an example of somebody earning £50,000 pounds per year starting their pension at the age of 40. 

40 divided by 2 makes 20, meaning they should aim to invest 20% of £50,000 (£10,000) every year, or just over £830 each month.

Of course, this projected figure should be adjusted with inflation as well as any salary increases. Where there are gaps in employment, due to ill health or a career break, these factors need to be considered, too.

Related reading: What is the lifetime allowance and how can I plan for it?

Seek the advice of an experienced pension adviser

We recommend that you speak with an experienced pension adviser, should you wish to be given a more accurate figure.

A pension adviser will have the retirement planning  tools available to produce a target figure that adjusts for:

  • Inflation
  • Investment growth rates
  • Salary increases
  • Time off work
  • Stress tests such as a stock market correction.

Most important of all is to start saving and investing for your retirement early. 

In any case, the sooner you start saving and investing for retirement, the greater level of control you’ll have over your long term plans. Starting early will also help you mitigate any macroeconomic factors such as recessions, market corrections and fiscal events.

If you are looking for guidance, find out more about our dedicated pension advice service.

How much should you pay into a pension – summary

As you can see there are a host of factors involved in understanding how much you should pay into a pension.

You need to consider your target income, desired retirement age, and the percentage of your income you need to invest.

Looking to speak to a local pension adviser?

Call 01329 550190 today.