How much should I be paying into my pension?
Planning for a comfortable retirement? Our guide covers how much you should contribute to your pension
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 scheme.
Sometimes you might make lump sum payments into your pension or 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.
How do contributions on workplace pensions work?
If you're over the age of 22, earning more than £10,000 per year and working in the UK, your employer must automatically enrol 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 enrol you. 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 would top 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).
What are minimum pension contributions?
For most people, the minimum pension contribution on auto-enrolment pensions is 8%. This is made up of contributions from you and your employer.
Your employer is obliged to contribute a minimum amount, which typically comes in at 3%. If your employer’s contribution is less than 8%, the remaining contribution to reach the minimum 8% contribution comes from your wages and any tax relief that you qualify for.
Minimum contributions are calculated by taking into account the money you contribute from your wages, your employer’s contribution and tax relief from the government.
Pension contributions for the self-employed
Just because you’re self-employed doesn’t mean you can’t contribute to a pension. And arguably it’s even more important that you do so, given that there’s no employer to make contributions on your behalf.
With that in mind, the onus is on you to contribute more from your wages/income to ensure you can cover the cost of your lifestyle in retirement. You can also still benefit from tax relief from the government.
Pension options for self-employed people include a Self-invested Personal Pensions (SIPP) and a stakeholder pension.
How does tax relief affect workplace pensions?
Tax relief is available on your workplace 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 (known as salary sacrifice)
If 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 choose – subject to the pension provider's terms and conditions.
This might be regular monthly contributions, via Direct Debit, or one-off lump sums – or a combination of the two.
Do I receive tax relief on my private pension contributions?
You’re eligible for government tax relief on contributions to 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 in a private pension and add it to your pension pot automatically.
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 I contribute to my pension?
There’s no one size fits all approach to how much you should contribute to your pension. However, you should think about your possible living costs for 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?
Everyone’s circumstances are different, but here are some common guidelines for pension contributions.
When you started saving into your pension: A common rule-of-thumb is to halve your age at the time you start saving for your pension. You should aim to use that number as the percentage of your salary y to save each year. For example, if you started saving into your pension at 20, you should be saving 10% of your annual income into your pension. If you start saving into your pension at 40, this was increase to 20%.
Based on your final salary: Another 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 compounding - 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 to 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.
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 can 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 annual allowance, which is set by the Government. But changes were made this tax year.
For the 2023-24 tax year the annual pension lifetime allowance is set at £1,073,100 if you took your pension before 6th April 2023.
If you took your pension on or after 6 April 2023, there is no lifetime allowance charge.
How do I start a private pension?
Setting up a private pension can 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 without 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 foryou, using funds from the whole of the market. You will also get your own dedicated pension adviser to answer any questions you have.
When using the Profile Pensions Find, Check & Transfer service, a one-off arrangement fee of 1% of the pension value is charged when you transfer. All pensions found using this service will be checked for any existing benefits or penalties.
Keen to find out more? We make it easy to compare private pensions and find the right one for your needs.
Other useful guides
We have a range of helpful guides and tools to help with your pension planning:
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