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How much should I be saving towards my pension?

Posted on: 23rd Sep 2020 by: CamOuse Financial Management Limited

Research shows that we put ambitious targets on our retirement income and then underestimate how much we need to save to get there.

Before we delve into how much you should be saving, here’s a quick overview of the two main types of pension schemes:

In a defined benefit scheme your employer promises to deliver you an income in retirement. You’ll most likely have to contribute each month too, putting in a required amount.

These ‘gold-plated’ schemes are increasingly rare.

The other type of scheme is a defined contribution scheme. If you have this type of scheme, you will save into this and get contributions from your employer too. The money is invested to build a pot which will then fund your retirement.

If you have a defined benefit scheme, you just need to save as much as your employer says. But with a defined contribution scheme things are a little more complicated… The onus is on you to deliver the money you need in retirement – the more you save, the more you get.

How much will I need in retirement?

In retirement, your outgoings are likely to be lower. For instance, most people will be mortgage free and not supporting children. In the finance industry, there’s a vague rule that some currently aged 40 would need around 50% of their current income to have the same standard of life in retirement.

You should also factor in the state pension. Under the new flat-rate scheme this is worth £155.65 per week (£8,094 per year). So, someone targeting a retirement income of £23,000 would need to contribute £16,000 from their own pensions.

How much should I be saving?

Naturally, the amount you need to save depends on the size of the pension you want. However, it also depends on your age.

For instance, putting 12% of your salary towards your pension might be enough if you start in your 20s, but if you leave it until you’re 40, you might need to pay in closer to 20% to get the same level of income.

It’s sometimes said that the rule for working out what percentage of your salary needs to be going into a pension is half the age from when you started saving. So, if you started at age 30 it would be 15%.

This said, given the variation in salaries and personal circumstances, it can be a good idea to get a slightly more profound insight into your finances. 

You could use some sort of pension calculator. There are plenty of different calculators online that let you play around with the numbers. A quick search on Google will reveal plenty. 

All things considered, this can’t give you quite as clear a view on your financial retirement scenario as speaking to an independent financial adviser. They should have the knowledge and experience to help you get both a clear view of your current situation and the changes you could make so that your money works harder towards your goals.

Tags: Retirement,


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CamOuse Financial Management is authorised and regulated by the Financial Conduct Authority.

None of the information contained in this website should be considered as personal recommendation and is for information only. Should you wish to make a financial transaction we recommend that you take personal financial advice after a thorough review of your personal and financial circumstances.

The information contained within the website is subject to the UK regulatory regime and is therefore primarily targets at customers in the UK.

Registered address: Unit 111, Lancaster Way Business Park, Ely, Cambridgeshire, CB6 3NX

Registered in England and Wales. Registered No: 5662116.

Peninsula: Accredited Standard

Understanding the true cost to your business

Pension arrangements must be available for all employees. There are three categories of employee:

Eligible

Aged between 22 and State Pension Age (SPA) with qualifying earnings over the Auto Enrolment earnings trigger

Non-eligible

Aged between 16 – 74 with qualifying earnings between lower threshold and the Auto Enrolment earnings trigger
 
Aged between 16 -21 or SPA – 74 with qualifying earnings over Auto Enrolment earnings threshold

Entitled

Aged between 16 -74 with earnings below the qualifying earnings lower threshold

Important Notes

  1. Eligible jobholders must be auto-enrolled
  2. Non-eligible jobholders are allowed to be auto-enrolled if they want to
  3. Entitled workers are entitled to join a pension scheme, but the employer doesn't have to contribute

Qualifying Earnings lower threshold

£5,772

Qualifying Earnings upper threshold

£41,865

Automatic Enrolment earnings trigger

£10,000

Minimum contribution level options:

8% of Qualifying Earnings of which

3% is employer's (starting at 1%)

9% of Basic Salary of which

4% is employer's (starting at 2%)

8% of Basic Salary of which

3% is employer's (starting at 1%)

(Where basic salary is at least 85% of total earnings)

7% of gross earnings of which

3% is employer's (starting at 1%)

Pay reference period

Essentially the frequency that the jobholder is paid e.g. monthly, weekly etc. but with reference to the tax month, week etc. therefore it may not be the same as the payroll period.

Deduction and payment of contributions

It is the employer who is responsible to calculate, deduct and pay all contributions to the AE scheme. NOTE – the first and last contributions are likely to be for less than a full pay reference period and should be adjusted accordingly.

Payroll services

It can be seen that it is very important that the payroll system synchronises with the AE scheme otherwise the employer will not be carrying out all requirements and then penalties will be incurred.

Staging date

Based on the employer’s payroll size as at 1 April 2012 and can be found at www.thepensionsregulator.gov.uk/employers using your PAYE reference. The Qualifying Workplace Pension Scheme must be registered with The Pensions Regulator within 4 months of the staging date.

Compliance and communication

Postponement

Auto-Enrolment can be postponed for up to 3 months:

  • For current eligible employees
  • For workers that meet the criteria in the future for the first time e.g. avoid joining temporary or lower paid workers

Opt-Outs

All eligible employees must be auto-enrolled, but can, with the correct notification, opt-out within one month of joining the scheme and be treated as never having joined. They can opt back in and will automatically be auto-enrolled every 3 years in any case!

Communication

There is a wide range of information that must be provided to all employees at certain times, such as:

  • The date auto-enrolment took place for eligible jobholders
  • That non-eligible jobholders have the statutory right to opt in
  • Entitled workers have the right to request the employer to enrol them into a pension scheme

Salary sacrifice

Contributions can be paid by effectively reducing salary, which saves on NI contributions, but employee must choose to do this – they cannot be forced, so a contractual variation will need to be implemented.

Default investment fund

Investment Options

All eligible employees will be automatically invested into a default investment fund, which is a balanced risk fund that is “life styled” to account for the employees approach to retirement. They also have the option to invest in a wide range of funds of their choosing.