What you need to know about pension contributions

We build up our pension throughout our working life, and there is no right or wrong answer on how much you should put in… but one thing is clear, the earlier you start, the better!

What is a pension contribution?

A pension contribution is simply the money you add, or someone else adds, to your pension.

When should I start paying into a pension?

If you want to live a comfortable lifestyle, all of the experts (including us) would advise the same thing: start saving early.

If you start contributing to your pension earlier in life, you’ll benefit from the many years of saving plus the compound interest earned over the years (compound interest is when your potential investment returns get re-invested into the market, so you make money on the money you’ve gained, not just what you contributed). If you only start contributing later on in life you’ll have to start contributing a much higher percentage of your salary over a shorter period to achieve a comfortable lifestyle in retirement.

Here is an example:

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What should I pay into a pension?

There is no right or wrong answer on how much you should pay into a pension. It entirely depends on how much you can afford, what your salary is, how old you are and what kind of lifestyle you would like when you retire.

Think about the kind of lifestyle you would like when you retire, and what kind of income you would need to support that, and work backwards from there. Remember that by the time you retire, your monthly outgoings might look a lot different to now – you may be mortgage free, have downsized housing, and not paying things like commuting costs. Some general tips for pension contributions would be:

  • Maximise your workplace pension and see what the highest percentage is that your employer would match.  
  • Small sacrifices can make a big difference overtime, so if you already have enough savings to cover any emergencies, and have some spare cash left over, adding this to your pension is a good way to maximise that cash.  

The Retirement Living Standards, based on independent research by Loughborough University, have been developed to help us to picture what kind of lifestyle we could have in retirement.

The Standards are split into three lifestyles: minimum, moderate and comfortable. Roughly speaking, a single person will need about £10k a year to achieve the minimum living standard, £20k a year for moderate, and £30k a year for comfortable. You can read the Standards here.

How do government pension contributions work?

There are two ways to claim tax relief on your pension.

The first is called ‘relief at source’. What this means is that once you’ve paid your pension provider your contribution, if you’re on the basic tax rate, your pension provider will claim 20% tax relief directly from the government, and they add this to your pension pot. Personal/private pensions always used the relief at source method.

The other method is called ‘net pay’. This is where your employer deducts your pension contributions from your pay before your pay is taxed, meaning you pay less income tax, as your income tax would be based on less money.  This method means you don’t get any tax relief reimbursed directly into your pension, but it means you get to take home more money each month by paying less tax overall.

How to check your pension contributions

Whether you have a private pension or a workplace pension, your pension provider should have provided you with account details, so you will be able to log in and check your contributions. You should also get a statement at least once a year, with full details of how your pension is performing, sometimes included predicted total for your retirement age. You can check your state pension forecast on the Government website and by clicking here.

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Fees correct as of 20/04/2022 and may exceed the stated value.

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