Hello Rosie, I’m 27 and wanted to know how much I should have put in my pension by 30 so I can make sure I hit it and stay on track? What do you recommend?
Many people are scared to think about their pension, especially if retirement seems unfathomably far away, so well done for tackling it head-on and thinking about how much you’re putting away.
Saving for your future is really important, and pensions are a great way of doing so. You get tax relief on money you put in, you can take a 25% lump sum tax-free when you retire and, if you’re employed, you also get contributions from your employer.
For the purposes of this blog, I’m going to assume that you’ve got a defined contribution pension - one where you put money in through your working life and the retirement income you get depends on the size of your pot - and not an increasingly rare final salary one, where the size of your pension depends on, unsurprisingly, your final salary.
The magic number?
There are various different numbers bandied about for how much you should be saving into your pension. While there’s no hard and fast rule, as everybody’s circumstances are different, some say you should aim to save 12.5% of your overall income.
Another rule of thumb is you should be saving a percentage equivalent to half the age you were when you started your pension. So let’s say you started paying into a pension when you were 26 - you’d want to be saving 13% of your income.
The 13% represents a combined total of money added to your pot by you and, assuming you’re employed, your employer (which under auto-enrolment rules must be at least 3%), plus government tax relief.
So if you earn £30,000 per year, in total you’d want to be adding around £313-325 per month into your pension. If you’re employed and your employer matches your contributions, you’d need to be adding around £125 per month yourself - tax relief and money from your employer would top this up.
If you’re a freelancer you won’t get employer contributions but will still get tax relief, so it’s still worth saving into a pension. There’s more info in our freelancer pensions blog.
If you save into a pension for 40 years, contributions like this could add up to a pot of around £280,000 - though this will vary depending on things including investment returns, inflation, charges and how much your income changes.
Work out how much you need to retire
According to the Pensions and Lifetime Savings Association, 77% of people don’t know how much they’ll need in retirement. It’s hard to give a blanket ‘you should have saved £xx by your 30th birthday’ as pension saving is such an individual thing.
However, there are a few things to think about to give yourself a good idea of how much you should ideally be putting away, including:
When do you want to retire?
- You’ll need a lot more saved if you plan on retiring at 60 than if you carry on working until you’re 70. Think about your ideal retirement age and go from there - the earliest you can currently take money from your pension is 55.
What income will you need in retirement?
This comes down to lifestyle. Research from the Department for Work and Pensions suggests that if you earn £30,000/year, you’d want to retire on around 2/3 of that - so would need £20,000/year in retirement.
However, it’s worth taking some time to figure out what you actually spend in a year now - including housing costs, bills, groceries, travel, going out and less regular expenses like holidays and Christmas presents. This will give you a rough idea of how much you might want in retirement, though remember you may have lower housing costs then (if you’re fortunate enough to have a mortgage you’ve paid off), and may want to spend more on holidays, for example.
How is your money invested?
When crunching the numbers you need to factor in investment returns and fees. In general, the higher the returns and lower the fees, the less you need to put in yourself to get the income you want.
When it comes to investments in your pension, usually your provider will invest in a range of places for you. You can then leave your money as is, or be very hands on, choosing the exact funds your pension is invested in. Which option is right for you will depend on how closely you want to monitor your pension and how much you’re prepared to research different investment options.
Either way, it’s worth being aware of how much you’re being charged. It’s also important to remember it’s impossible to be certain of return rates when it comes to investments, and there’s a chance the value of your pot could go down as well as up.
You can use this handy calculator from the Money Advice Service to see what sort of pension income you could expect from different contributions and retirement ages. The calculator also takes into account inflation, investment returns and pension provider fees and can give you a good overall picture.
For example, a 27-year-old like you earning £30,000 and wanting to retire aged 68 with a retirement income of £20,000 should be saving around £245 a month, assuming that your employer adds another 3% of your salary and you will get the full state pension (see below).
Don’t forget the state pension
This should add to your retirement income, assuming you’ve made at least 10 years of National Insurance contributions. To get the full state pension, which is currently £175.20 per week, you need to amass 35 years of contributions or credits.
You can see how many years of NI contributions you have with the Government NI checker, and you’re able to make voluntary contributions for any missing years in order to get the full amount, though there is a limit to that.
Bear in mind that the state pension age is currently 66, and it’s set to rise eventually to 68. And there’s no guarantee that it won’t rise further, so while it’s good to know the rules you need to be aware that it could change before you reach retirement age.
Keep track of pensions and review them often
Once you’re on top of how much you should be saving, make sure you regularly check your pensions. If you move to a new job, it’s likely you’ll get a new pension set up for you which could be with a different company, so it’s worth writing down all of the details of each pension in one place. You can also consolidate existing pension pots which can make them easier to keep track of - Starling’s Marketplace partner PensionBee is one of the providers that lets you do this.
It’s also worth checking what fees you’re paying for your pensions - there’s nothing to stop you switching to a cheaper provider if you find a cheaper option elsewhere, but do look out for any exit fees your current provider charges. It can be worth speaking to an independent financial adviser before you do this so you don’t come across any unexpected pitfalls.
Make sure you have an emergency net
The current coronavirus crisis highlighted the distressing fact that many people don’t have enough savings set aside for unexpected situations. Whilst it’s great to be saving into a pension, you should first have at least 3-6 months worth of expenses saved in cash that you can use if you face any loss of income or big expenses in the future.
The above is intended as general information and does not constitute advice in any way. You should take independent advice if you have any questions about your specific circumstances.
Remember that with investments, your capital is at risk. Pensions can go down in value as well as up, so you could get back less than you invest.