A Guide on Pension Savings
How much should I be saving for my pension?
How much money you will need for your pension savings is purely individual. With a few realistic expectations going forward, it doesn’t need to be a worry.
It’s only natural that once you retire, you won’t need as much money as you did in your employed younger years. However, it’s always wise to plan for your future and start putting away a reasonable amount each month; mostly, so you can sleep easy at night. But, in order to do so your best bet is to work out how much cash you will need for your retirement.
This is where it may get tricky, as how much do you really need? Your best bet is to speak to a financial advisor who can break it down for you, and give you an idea of what you will need in the future and how much you should be putting away into your pension savings.
How much will I need in retirement?
As stated previously, by consulting with a financial advisor you should be able to get an idea of how much you need for your retirement. Some people even have the luxury of retiring for 30 years, and if this is you, you need to think about how your money will last.
It is estimated that for a comfortable retirement, £260,000 in total is required. This works out as £9,000 a year from yourself, combined with what your employer will match. However, your retirement should be tailored for you and this is just an estimate.
It’s easy to want to mirror your current life now, and that’s not necessarily a bad thing as it can be the basis of how much money you will need; but realistically, the older you get, the less you will probably do. There will be no commuting to work and going on strenuous excursions etc.
But when thinking about how much financial stability you need, just be honest with yourself. You have to think about how much money you already have in your pension pot if you even have a pension pot. Then you need to think about how much are you currently putting away and if you have reviewed your pension statement recently.
This may need to be altered if you’re deciding to save for more or less.
It’s also worth noting how many years you have left until you retire, and how long you would like to retire for even though this cannot necessarily be calculated, a ballpark figure allows a good guideline to build around.
Other considerations to make will be based on how much your personal investments may increase or decrease up until your retirement date and also, what your employer is contributing. All these factors can be discussed with an advisor to get a more realistic figure of what you need to be working towards.
When should I start saving for my pension?
In reality, the sooner the better. The earlier you start saving, the more you can enjoy in later life.
Luckily, legislation released in 2012, means that employees are automatically enrolled in some sort of pension scheme. This scheme is referred to as the auto-enrolment pension, and the basis of it involves yourself contributing 5% of your earnings, whilst your employer adds an additional 3% into the pot.
This will ensure that employees will have some sort of pension going forward. Each year you can review your pension and decide whether you wish to add more or not. The more you contribute; the more your employer may also contribute. To help you decide what you need to be paid can be calculated by a financial advisor.
Pension savings credit threshold
You may be thinking that you now just want to add all the money you can into your pension savings, which is great, but as always, this does come at a price in itself. Generally speaking, you are free to put as much in your pot as you like and there is no actual limit. However, there is a limit on how much is tax-free.
This is similar in line with general tax, as you can add up to £40,000 per year tax-free. Anything on top of this will have tax added on. Anything below is automatically put on a tax release.
For more information about contribution limits, inquire with your financial advisor about your current financial circumstances.
What percentage of my salary should go towards my pension?
A good place to start with percentages is calculating this alongside your age. You should be automatically enrolled into a pension through your employer, of which a percentage amount will come out or you can adjust this.
The starting rate is usually between 5- 12%, but as you get older and closer to retirement, you should consider putting away more as the years go by. This is just approximate but at the age of 30, you should be putting 15% away, at 40 this increases to 20% and then in your fifties, it is recommended to put 25% away, if possible.
When can I withdraw my pension?
The general age of release is usually 55 unless negotiated otherwise with your employer/pension supplier. Even if you’re still working at this age you can still take money from your pension, whether this is a lump sum or monthly payments. This can sometimes top up your current salary if need be.
There are circumstances where you may be able to release your pension earlier, say for example you become ill or your profession may have an earlier retirement age. Professional athletes will retire earlier, and therefore will require an earlier pension release.
It all comes down to your pension provider, whether this is your employer or a private personal pension. Generally speaking, you would require consent if you wanted to release your pension early, but again, this depends on the terms and conditions of your policy.