How much should I be paying into a pension?

Racheldevon

Hi,

I wondered if anyone could point me int he right direction? I'm very nearly 26 years old, and since starting my first proper job after graduating, i've been paying into a pension (since about September 2008).

I currently pay in 5% of my salary, and work pay in £2 for every £1 I pay in - is this a good rate (I know very little about pensions)? Should I be trying to increase my pension contribution (work will only pay in the £2 for every £1 up to the maximum of me paying in 5%. In total about £300 per month is going into my pension.

I do have most of my student loan to still repay, and a credit card and student overdraft to clear still. I presume i'm best repaying the debts first then perhaps increasing pension payments? Or, is it best to clear the debts, then a separate savings account?

Any advice much appreciated

jem16

Racheldevon wrote: »

I currently pay in 5% of my salary, and work pay in £2 for every £1 I pay in - is this a good rate (I know very little about pensions)? Should I be trying to increase my pension contribution (work will only pay in the £2 for every £1 up to the maximum of me paying in 5%. In total about £300 per month is going into my pension.

So you pay in 5% and the company pays in 10% - pretty good. A total of 15% - normal rule of thumb is pay in a percentage equal to half your age so you are doing more than that already.

I do have most of my student loan to still repay, and a credit card and student overdraft to clear still. I presume i'm best repaying the debts first then perhaps increasing pension payments? Or, is it best to clear the debts, then a separate savings account?

Clear you debts and then get some cash savings behind you - usually around 6 months wages. Then you can think of using S&S ISAs. If you become a higher rate taxpayer you could then look at increasing pension contributions but I see no point before this.

chrissy21_2

Hi why dont you try www.pensioncalculator.org.uk good for getting a rough idea of how much you need to be paying and what you will get.

Racheldevon

Thanks to you both, that's really helpful, at this stage I think i'll focus on clearing some debts and worry about the pension side of things later (& at some point try & save towards a morgage deposit)

gadgetmind

That 2 for 1 match up to 5% is sweet so you're doing the right thing by doing the full 5%. Maybe consider increasing this later, particularly if you hit higher rate tax, but don't be tempted to lower it!

bendix

Just make sure you keep increasing it annually as well. I reckon you could think about increasing to 6% next year, 7% the following year and so on. It will stand you in good stead as you age.

Good start. You're doing well. My faith in the young is coming back - it's just their parents that are hopeless, financially.

dunstonh

I currently pay in 5% of my salary

That is before tax relief. So, remember that you net pay (what you take home) is actually only reduced by 4%. The other 1% is tax relief.

That assumes basic rate tax relief. Higher tax payers can benefit further by increased tax relief.

work pay in £2 for every £1 I pay in

So, what this really means is that for every 80p you pay, £3 is going into the pension (you pay 80p, tax relief adds 20p and work add £2 = £3)

Racheldevon

Thanks again for the replies - I hadn't considered the tax relief implications. So, is my pension contribution is worked out before all other deductions, like student load, tax, NI, or once these deudctions are taken? The top point of my payscale doesn't reach into the higher rate tax bracket, and i'm pretty close to the top of my scale. I'm also not in the job I'm working towards as a final career, so i'm wondering how it all works if I move to another job? Can you transfer your pension to say the NHS or another employer, or does it stay as a small pension and you then start from scratch? Probably should know all of these things really

ffacoffipawb

dunstonh wrote: »

That is before tax relief. So, remember that you net pay (what you take home) is actually only reduced by 4%. The other 1% is tax relief.

If £300 going in (based on 15%), the OP earns £24,000

£24,000 after tax is £18,682.00 net.

Taking 5% for pension, then after tax we have £17,722.00 net.

So a 5% drop in gross due to paying into a pension is a 5.2% drop in net pay, not 4%....

Item Per Annum
Gross Income £24,000.00
Pension Deductions £0.00
Taxable Income £16,525.00
Tax £3,305.00
National Insurance £2,013.00
Take Home £18,682.00

With 5% pension contribution ...

Item Per Annum
Gross Income £24,000.00
Pension Deductions £1,200.00
Taxable Income £15,325.00
Tax £3,065.00
National Insurance £2,013.00
Take Home £17,722.00

Take home pay has dropped 5.2%

Salary Sacrifice would give a take home of £17,866 but is still a drop of 4.4% in take home.

Procrastinator333

ffacoffipawb wrote: »

If £300 going in (based on 15%), the OP earns £24,000

£24,000 after tax is £18,682.00 net.

Taking 5% for pension, then after tax we have £17,722.00 net.

So a 5% drop in gross due to paying into a pension is a 5.2% drop in net pay, not 4%....

Item Per Annum
Gross Income £24,000.00
Pension Deductions £0.00
Taxable Income £16,525.00
Tax £3,305.00
National Insurance £2,013.00
Take Home £18,682.00

With 5% pension contribution ...

Item Per Annum
Gross Income £24,000.00
Pension Deductions £1,200.00
Taxable Income £15,325.00
Tax £3,065.00
National Insurance £2,013.00
Take Home £17,722.00

Take home pay has dropped 5.2%

Salary Sacrifice would give a take home of £17,866 but is still a drop of 4.4% in take home.

I think u need to do a bit of research on how tax relief on pension contributions works.

jem16

ffacoffipawb wrote: »

With 5% pension contribution ...

Item Per Annum
Gross Income £24,000.00
Pension Deductions £1,200.00
Taxable Income £15,325.00
Tax £3,065.00
National Insurance £2,013.00
Take Home £17,722.00

£1200 is being deducted but £1500 is actually being paid into the pension which is a rate of 6.25% which after tax relief would be 5%.

To be a true 5% rate, only £960 would be paid into the pension thus giving a take home pay of £17,914.36 which is a reduction of 4.1%.