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pension contributions

How much should I be paying into my pension?

Read time: 5 minutes

Planning for a comfortable retirement? Our guide covers how much you should contribute to your pension

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We've teamed up with chosen partner Profile Pensions to help you choose the right private pension plan. They can help you track down and combine your old pensions if you decide it's in your best interests to do so and help you choose the best investment plan for you, using funds from the whole of the market. You'll also get your own dedicated pension adviser to answer any questions you may have. 

What are pension payment contributions? 

Pension payment contributions are the amount you pay into your pension fund. Typically, if it is a workplace pension, you'll make monthly payments out of your salary. Or if you're paying into a private or personal pension you are likely to make regular, often monthly, payments into the pension plan.

Sometimes you might make lump sum payments into your pension - or make a combination of regular and lump sum payments.  

The reason it's called a contribution is that you're not the only one paying into your pension pot. If you're employed, then your employer is likely to also pay contributions into your workplace pension. Not only that, but the Government also contributes in the form of tax relief  - this is the case for most types of pension.

Once you've made your monthly pension contribution, your pension provider will invest this money on your behalf. With workplace schemes you’re likely to have some degree of choice about how and where your pension cash is invested, depending on the scheme. There may be a range of investment funds to select, for example. 

With private pensions you'll also be given a choice about how and where your money is invested.

How do contributions on workplace pensions work? 

If you're over the age of 22, earning more than £10,000 per year and working primarily within the UK, your employer must automatically enroll you into the company's workplace pension scheme. You have the option to opt out if you want to, but it’s a legal requirement for employers to enroll you in the first instance. If you choose to opt out, you’ll lose the contributions that your employer makes.

By way of example, if your monthly workplace pension contribution is £40, then that amount will be deducted from your wages. Your company might then add £30, and the government make up £10 in tax relief. This generally means that every time you contribute £40, your pension pot gets £80 in total (but this is subject to limits).

Tax relief is available on your work place pension on contributions up to 100% of your salary (up to a maximum of £40,000 per tax year) and can be applied automatically by your pension provider in one of two ways: 

  • Your employer may take pension contributions out of your pay before deducting Income Tax

  • If your rate of income tax is 20%, and your contributions are paid after tax, then your pension provider will claim it as tax relief and add it to your pension pot. This is known as ‘tax relief at source’ and is common for private pensions that you have set up yourself, outside of a workplace pension

How do contributions on private pensions work?

You can make contributions into a private pension in any way you wish – subject to the pension provider's terms and conditions. This might be regular monthly contributions or lump sums – or a combination of the two.

As well as your own contributions to a private pension, You’re also eligible for government tax relief on a private pension.  as well as a workplace pension. Tax relief is paid at your highest rate of income tax, so 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers.

Your pension provider will claim tax relief at 20% on your contributions on a private pension and add it to your pension pot. Higher and additional rate taxpayers will then have to claim the extra tax relief they are entitled to through a self-assessment tax return each year.

How much should you contribute to your pension?

When working out how much you should contribute to your pension, the first thing to consider is your expected living costs when you retire. Will you have paid off your mortgage or will you be renting? What sort of income do you think you'll need to live on? 

It is a common misconception that your pension income will need to match your current salary for you to maintain your lifestyle once you’ve retired. But this doesn't factor in the financial changes that come with retirement. You won't be paying tax at the same level, you may have paid off your mortgage, you're less likely to have dependent children and you won't be commuting to and from work, for example.

A common rule-of-thumb is that your income post-retirement should be between half and two-thirds of your final salary, depending on your circumstances.

Within the pensions industry it is sometimes quoted that a good pension pot will be around 10 times your final salary. This can sound like a big number, but the earlier you start putting money into your pension the longer your money will be invested - and hopefully have time to grow. 

It is likely many people will be able to make bigger pension contributions towards the end of their career, as salaries are likely be higher and other financial commitments, such as a mortgage, are smaller or paid off.

To get a clearer idea of what you might need to save now for a comfortable retirement read our retirement planning guide.

How much can you pay into a pension?

There is no cap on the amount you can contribute each year to your pension. But there are maximum limits on tax relief. 

Whether you’re paying into a private pension or into your workplace pension, you can pay in whatever amount you’d like, but the Government's contribution, in the form of tax relief, will go up to a maximum of 100% of your salary with a total maximum of tax relief on £40,000 of contributions each tax year. 

What is the pension annual allowance?

Your annual allowance is the most you can save into your pensions in a tax year (6 April to 5 April) before you have to pay any tax. 

The maximum annual tax-free allowance for pension contributions is currently set by the Government at £40,000. This means that you can contribute up to this amount before being taxed. However, you are able to carry over any unused allowance from the previous three years into any one year.

What is the pension lifetime allowance?

You will usually only pay tax if your pension savings are worth more in total than the lifetime allowance, which is set by the Government. 

For the 2021-22 tax year the annual pension lifetime allowance is set at £1,073,100. 

How do I start a private pension?

Setting up a private pension iscan be quick and simple online. But it is a good idea to take some time to do your research first. You don’t need a financial adviser or broker to arrange a private pension. But getting expert and impartial advice is a good idea if you're not a confident or experienced investor - although this will come with an added cost. 

We've teamed up with chosen partner Profile Pensions to help you find the right private pension plan. They can help you track down and combine your old pensions if you decide it's in your best interests to do so and help you choose the best investment plan for you, using funds from the whole of the market. You will also get your own dedicated pension adviser to answer any questions you have.  

Capital at risk. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment please speak to a financial adviser. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Ltd is an Introducer Appointed Representative of Profile Pensions, a trading name of Profile Financial Solutions Limited which is authorised and regulated by the Financial Conduct Authority. FCA number 596398. Registered in England & Wales, Company Number 07731925. Registered office address: Norwest Court, Guildhall Street, Preston, PR1 3NU.

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