How much should you really be saving in your pension?
Financial advisers are often asked, “How much should I be saving for my retirement?” and while many advisers will give their clients a rule of thumb figure, it’s a difficult question to answer accurately.
Those advisers who do give a figure are usually working with people who have a lot of disposable income in the first place, so the figures they quote are not realistic for most people.
Rather than setting these rule of thumb figures, another way is to work backwards. Set a figure of how much you think you will need for a comfortable retirement and then work out how much you’d then need to put away each month.
For example, let’s say you want a pension pot of around half a million pounds when you retire aged 65. The table below shows what percentage of your gross pay you’d need to put away to exceed £500,000, depending on what age you start saving into your pension (based on 5% after growth):
In other words, starting early is the best rule of thumb when it comes to your pension.
While the figures may look frightening if you are in your 30s or 40s and have only just started your pension savings, there are a couple of important things to remember.
Firstly, from April 2019 the law means that for most of us, the minimum auto-enrolment pension contribution will be 8% per month. You also receive tax relief on any pension contributions you make, which will boost how much actually goes into your pot.
Once auto-enrolment contributions start to rise, people could be saving 10% and 15% of their salary. This means hitting the bottom end of this target suddenly becomes a lot more achievable
As an example, an apprentice in an auto-enrolment scheme on £18,000 a year would need to save into their pension an extra £24 a month. This creeps up to £32 a month for someone earning £24,000 and £40 for an annual salary of £30,000.
This should feel more manageable. Although, we all have different priorities at different stages of life, such as paying student fees, saving for a deposit on a house or starting a family, so it’s difficult to adopt a one size fits all approach.
What we do know is, the sooner you start saving into your pension, the better off you’ll be. Not least because the money you put away will benefit from compound interest, which Albert Einstein said is the “most powerful force in the universe”.
Let’s say, from the age of 25 you put £20 in a jar each month. By the time you reach 65 you’ll have £9,600.
Now, let’s say you save that £20 in a pension that grows, on average, at 6% per year. By 65 you’ll have over £38,000. That’s the power of compound interest.
The bottom line is the sooner you start saving into a pension, the more your savings will grow. And more money means more freedom to do the things that you want to do in the future.
Jamie Smith-Thompson is managing director of pension advice specialists, Portafina