The "half your age" rule

KevinG

When Martin recommends saving a percentage of your income that is half your age when you start, is this a percentage of your total gross income or just that part above the lower earnings limit of £6240? I ask because if you tell your employer you want to contribute, say 15%, that will not be taken as 15% of your gross income but just that part over the lower earnings limit, so you would have to specify a higher percentage to achieve 15% of the total.

dunstonh

When Martin recommends saving a percentage of your income that is half your age when you start, is this a percentage of your total gross income or just that part above the lower earnings limit of £6240?

It's a really crude measure to get you thinking of the ballpark you should be paying. It's not accurate enough to fine-tune it like that. However, historically, as the guide predates Martin Lewis, was of your total gross income. The guide predates auto-enrolment.

Marcon

https://forums.moneysavingexpert.com/discussion/6687200/the-half-your-age-rule

Depends on your employer. Plenty base pension contributions on your whole basic salary, with no lower and upper limits. Others use 'band earnings' i.e. earnings between £6,240 and £50,270 per annum. Always worth checking so you know exactly what applies to you.

KevinG

https://forums.moneysavingexpert.com/discussion/comment/82172837#Comment_82172837

OK thanks, sounds like even my 22 year old son might have to specify quite a large percentage.

FIREDreamer

30% is useless for a 60 year old unless working to 80 I suppose. And no tax relief from age 75 either, assuming contributions can still be made after that age.

Veloflyer

I'd say that rule is the minimum required as the tax breaks that currently apply are - IMHO - not guaranteed for the future.

KevinG

https://forums.moneysavingexpert.com/discussion/comment/82172913#Comment_82172913

Thanks, I'll ask my son to check this.

hugheskevi

It is well worth planning and investing in more detail than only using the rule of thumb and only looking at pensions.

You should consider the following 3 wrappers as a minimum:

• Lifetime ISA
• Stocks and Shares ISA
• Pension

A pension is great when one or more of the following apply:

• Employer contributions are provided, which may include a matched contribution
• Salary sacrifice is available
• Higher or additional rate income tax is being paid
• Means-tested benefits, including Universal Credit and Child Benefit, would be increased if pension contributions were made

For someone who would only receive basic rate income tax relief on contributions and nothing more, a pension is unlikely to be the most attractive option. The obvious alternative for such an individual would be a LISA.

It is also possible to put funds into a Stocks and Shares ISA, possibly with a view to using those funds to enable larger pension contributions from salary in the future when one of the above features applies. This is likely to lead to a better outcome, although ISA funds count as capital in the event of benefit claims, whereas pension funds do not, so that might be a consideration.

NoMore

it’s just a very rough rule of thumb. It’s more to show that the earlier you start the less per month you need to contribute to get the same outcome.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82173110#Comment_82173110

Another point is that most people underestimate how much they need to retire reasonably comfortably, ( and maybe early) and how much they need to save up, ( via a pension or otherwise) to get there. So like you say the ' half the age' statement, is more to push you in the right direction than anything.

Marcon

For someone who would only receive basic rate income tax relief on contributions and nothing more, a pension is unlikely to be the most attractive option. The obvious alternative for such an individual would be a LISA.

…but be aware of the age restrictions:

https://www.gov.uk/lifetime-isa