How much pension do I need?

Woman holding a surfboard on top of her head on her way to go surfing

We’ve all heard people aren’t saving enough for their retirement, writes financial adviser Samantha Gould. But we’re in the middle of a cost-of-living crisis. So I’m not about to tell you to save more money or prioritise your pension saving right now. What I will explain is how you can see where your long-term finances are at, so you can feel confident about planning for your future.

Rule #1… don’t panic!

Thinking about the retirement lifestyle you want will help you work out how much pension you’ll need. Do you want to travel more, or are you looking forward to putting on the brakes and taking it easy?

Remember, we’re all living longer! According to the Office for National Statistics (ONS), average life expectancy for a man aged 65 is now 83½. For women aged 65, it’s 86. So, your retirement savings might need to last 20 years. In 2070 the remaining life expectancy of a women at age 65 is 26.2 years.

Let’s start with where you’re at now.

Are you working? If you’re aged over 22 and earning over £10,000 in a single role, the chances are you’ll already be saving into a workplace pension.

What’s a workplace pension?

A workplace pension scheme (also known as automatic enrolment) is a cost-effective way to save for your retirement. Not only do you put money into your pension, but so does your employer AND you may receive tax relief from the government. That’s extra money you wouldn’t get if you weren’t in the pension.

Any employee aged between 22 and 65 and earning over £10,000 per year is automatically enrolled into their workplace pension scheme.

If you’re aged between 16 and 21 you can ask to join your workplace pension scheme, but your employer does not have to contribute.

How much does my employer contribute and how much do I contribute?

Where your employer pays in the minimum of 3%, you (the employee) must pay in 5%, which is deducted from your wages. This makes a total minimum contribution of 8%. This is based on your qualifying earnings, which is after the first £6,240 is deducted.

According to the ONS, in 2021 the average UK full-time employee salary was £38,131. Using this as an example, you’d be paying your 5% contributions on the qualifying £31,891.

You can see what you’re contributing every month on your payslip.

How much should I put into my pension?

You can contribute more and some employers will match an employee’s contributions up to a certain level. For example, some employers offer to match their employee’s contributions at 10%. This means 20% of your salary can be paid in to your pension, but it’ll only cost you 10%. This is a great way to build up your pension savings and you may also benefit from tax relief from the government on top.

Is there a maximum I can put in?

While there’s no limit on how much you can contribute, there is a limit on the amount of your contributions that will receive tax relief. In the 2022/23 tax year, you can receive tax relief on all your contributions where total contributions (including your employer’s contribution) are no more than your salary, up to a limit of £40,000. However, this will only be up to £4,000 if you have started to take money from certain pensions.

The lifetime allowance is currently £1,073,100, generally this is how much you can take from all of your pension savings before a tax charge will apply.

Will a change in salary or pay affect my pension?

The amount you contribute per month will be dependent on your earnings. If you increase or decrease your earnings, your monthly contributions will change.

When can I access my pension?

You can usually withdraw money from your workplace pension from the age of 55, and take up to 25% of your pension tax-free. This will rise to age 57 in 2028.

What is the State Pension and will I qualify?

You can only receive your State Pension when you reach State Pension age, which in 2022 is 66 for both men and women. Eligibility for the state pension is dependent on your National Insurance (NI) contributions. To qualify for the full state pension, you will need 35 years of NI contributions. But anything between 10 and 35 years of NI contributions would qualify for a proportional State Pension.

It’s important to remember that the State Pension age is increasing as we all live longer. It’s likely to be above age 70 by the time I reach retirement.

If you have less than the required 10 years NI contributions, you may receive pension credits – a benefit to ensure you have a minimum level of income at State Pension age.

If you’re a grandparent caring for young children

Grandparents under State Pension age who care for grandchildren under 12 can apply for a benefit known as Specified Adult Childcare Credits. These credits can fill in gaps in your National Insurance record, adding thousands of pounds to the value of your State Pension over time.

The scheme works by transferring National Insurance credits from a parent who does not need them to a grandparent or family member who is caring for the children. These credits can fill in gaps in individual National Insurance records.

What happens if I need to pause my pension, for now?

Prices are rocketing and we’re all feeling the squeeze. Right now, saving for your future self may feel like leaving yourself short of money. Money you need to spend on things like food and fuel.

With the cost-of-living crisis, stopping pension payments may be a better option for some people than going without other things. But if you do stop paying, think about when you can start paying again and do it as soon as possible.

How much pension do I need to live comfortably?

According to the Pensions and Lifetime Savings Association (PLSA)’s Retirement Living Standards, a single person needs £20,800 per year to fund to fund a moderate retirement, with two weeks in Europe and a long weekend in the UK every year. A comfortable retirement, with three weeks in Europe every year will cost you £33,600 a year.

Use MoneyHelper’s retirement calculator to see an estimate of the income you’ll get when you retire.