Pension Contribution Amount

kev2009

Hi,

I've been looking recently into how much to put into a pension scheme. I have read that your meant to put in half of what your age is as a percentage but it is a little unclear. For example, I am 37, so I should be putting in 18.5% of my wages into a pension... but does that mean:-

My contributions have to equal 18.5%
or
My contributions + employers contribution should equal 18.5%?

? I presume this % is based on the gross income, not net.

Just trying to work out how far out I am and then determine if I can increase my contributions.

Many thanks for your help!

jem16

kev2009 wrote: »

Hi,

I've been looking recently into how much to put into a pension scheme. I have read that your meant to put in half of what your age is as a percentage but it is a little unclear. For example, I am 37, so I should be putting in 18.5% of my wages into a pension... but does that mean:-

My contributions have to equal 18.5%
or
My contributions + employers contribution should equal 18.5%?

The latter.

? I presume this % is based on the gross income, not net.

Gross.

kev2009

hi, thanks so your saying its based on my contributions and my employers should equal 18.5% correct?

Thanks, just wanted to double check

Kind Regards

atush

Actually, it should be the employers contribs + yours + your tax relief.

And if you are saving outside your pension into S&S isas you could probably round down to 18%, as long as you keep raising your contributions with inflation/pay increases.

jamesd

kev2009 wrote: »

I've been looking recently into how much to put into a pension scheme. I have read that your meant to put in half of what your age is as a percentage but it is a little unclear.

That is one guide that's easy for people to use but you can do better if you want to.

A bit more work is to pick your lowest acceptable retirement income, what you can just get by on, and a more desirable level. Subtract £8,000 from that to allow for the state pension. For the remainder, say £10,000, multiply by 25 because a common rule of thumb is that you can take 4% of a capital value as income for life, increasing with inflation, without an excessive chance of running out of money or having to cut your income a lot. For that £10,000 target you'd need £250,000 using this rule of thumb.

Now use a regular savings calculator to work out what it takes to get to that target pension pot size. Put in 100 as the monthly payment, 31 as the number of years until you reach a state pension age of 68 and 4.5% as about 0.5% less than the average investment return of the UK stock market after inflation for the last hundred plus years. The answer is £80,652. Your target of £250,000 would take 250000 / 80652 x 100 = 309.02 gross pension contribution each month, increasing with inflation each year.

Say you wanted to try to retire at 55. To get to the same £250,000 in the 18 years until then the regular savings calculator says that each £100 would produce £33,186 in the pot. 250000 / 33186 x 100 = 753.33 a month. You would also need to add more to replace the £8,000 state pension income for 13 years from 55 to 68. A very rough estimate of that is perhaps 80% of £8,000 x 13 years = £83,200 pot size. 83200 / 33186 x 100 = 250.71 a month. the total of the two is £753.33 + £250.71 = £1004.04 a month increasing with inflation to be able to retire at 55.

Now add a safety margin of at least 50%, perhaps 100%, and compare that to your desired rather than minimum level. You should then end up with an amount that ends up being somewhere above your minimum but maybe below your desirable level.

I picked £18,000 total because that's about the median average household income for pensioners. Personally I use around £12,000 as my own minimum.

I've used after inflation numbers for all calculations here so the results are all in today's money.

The next step beyond the numbers I've used here is to use Firecalc to get a better understanding of how investment risk affects things.

kev2009

HI,

Thanks for replies. Jamesd - sent you a PM.