Question about the 'golden rule' of paying in to your pension

MattyJ87 · 7 May 2018 at 9:31PM

Hello,

This may have been covered before but I couldn't find anything on the main MSE site. Martin's golden rule for paying in to your pension is take your age, divide by two and whatever that number is, is the % you should be paying out of your salary in to your pension.

Should this be how much you pay in yourself directly (excluding employer contributions) or the combined amount of your contribution + employer contribution/tax relief? I'm getting a bit confused as for me these would be quite different numbers.

Thanks!

greatkingrat · 7 May 2018 at 9:45PM

It's the total contribution, including anything paid by your employer.

RuleTheWorld · 7 May 2018 at 9:54PM

employee contribution and employer contribution

nothing to do with tax relief - presuming this has been given at source

Paul_Herring · 7 May 2018 at 10:50PM

It's not a golden rule, it's a guideline to indicate the sort of amounts you should be looking at contributing - generally to dissuade the sorts of thoughts that the auto-enrolment amounts are anything like sufficient.

But it's generally taken to be the
- percentage of your gross wage,
- that arrives into your pension pot,
- from you
- and your employer,
- after any relevant tax rebates.

dunstonh · 8 May 2018 at 12:03AM

Martin's golden rule for paying in to your pension is take your age, divide by two and whatever that number is, is the % you should be paying out of your salary in to your pension.

Is he claiming that? We were using that back in the late 80s. It was a very crude guide then and remains so now. It is not a golden rule. Its only purpose is to get people thinking of the sort of ballpark they need to paying. It is not accurate for most.

kev2009 · 8 May 2018 at 10:47AM

Hi,

Just wondering, is this rule only upto a certain age? I mean if a person was 60, should they really be paying in 30%? I can understand the rule if you 20-30 for example as paying in 10-15% is a reasonable amount but as you get older unless your on a good salary will decent pay rises, it becomes harder to maintain.

If i take my age and divide by 2, i'm underpaying into my pension by 2.5% however due to having a mortgage etc, single income i'm not able to pay in more.

Kev

stoozie1 · 8 May 2018 at 10:53AM

I think it's meant to be the age at which you start contributing.

So if you start at 40, you do 20% thereafter.

But I'm not enamoured with it as a rule of thumb!

Aegis · 8 May 2018 at 10:55AM

kev2009 wrote: »

Hi,

Just wondering, is this rule only upto a certain age? I mean if a person was 60, should they really be paying in 30%? I can understand the rule if you 20-30 for example as paying in 10-15% is a reasonable amount but as you get older unless your on a good salary will decent pay rises, it becomes harder to maintain.

If i take my age and divide by 2, i'm underpaying into my pension by 2.5% however due to having a mortgage etc, single income i'm not able to pay in more.

Kev

For someone starting at 60, they'd need to be paying in a lot more than 30% of their salary if they ever wanted to retire. Such an individual would likely have left retirement planning far too late to make much difference.

The real goal of this formula is to show someone that starting in their 20s means they can probably pay in half of the proportion of their salary (e.g. 10%) than someone starting at 40 (i.e. 20%) for the rest of their life if they are aiming for much the same retirement income. It's just a rule of thumb though, and doesn't factor in acceptable risk levels, target income, target retirement age, inheritances, etc.

NoMore · 8 May 2018 at 11:08AM

People are way over analysing this, its not a rule. Its not a guarantee that you will have a good pension if you follow it.

Its just to demonstrate, quickly and simply that the earlier you start the less you have to contribute monthly. Its simple mathematics, starting older requires more money contributed monthly as less time before retirement.

Overall the more you can contribute the better off you will be.

Paul_Herring · 8 May 2018 at 11:13AM

kev2009 wrote: »

Just wondering, is this rule only upto a certain age? I mean if a person was 60, should they really be paying in 30%? I can understand the rule if you 20-30 for example as paying in 10-15% is a reasonable amount but as you get older unless your on a good salary will decent pay rises, it becomes harder to maintain.

Once again, it's a guideline, not a rule, and yes. In

- the year you start contributing
- you work out that percentage and
- keep to that percentage until you retire.

So, if you started paying in 14% at 28, and keep paying 14% (through pay rises, promotion, whatever, it's always 14%) then yes, at 60 you should still be putting in 14%.

If, however you don't start until 60, then you should be putting in 30% (probably a lot more actually, as noted.)

What you don't do (for this guideline) is increase the percentage as you grow older - if you started at, and continued with, 14% at 28, you don't increase it to 15% at 30 or 20% at 40.

But to re-iterate, this is a guideline to get you in the right ballpark of what you should be contributing, not a hard-and-fast rule.

dunstonh · 8 May 2018 at 12:00PM

Just wondering, is this rule only upto a certain age?

its not a rule. its a crude guide to a ballpark figure if you are looking to retire at state pension age.

Remember we were using the same guide 30 years ago when the state pension age was lower and annuity rates double the current level and investment returns were higher. So, you cant expect the same outcome today. That is why it is a very crude guide.

Some people treat retirement planning like a tick box exercise. e.g. Pay into a pension - yes, 1% with employer. So, I can tick that off the list of things to do. The half age guide is to make them realise that they are way off the mark.

Are you going to retire at 60 or 68? (big difference in contribution levels if you do)
Are you investing low risk or high risk (or take a high risk or low risk view as a variation of that)? (big difference in contribution levels again)
Are you annually increasing your contributions or keeping them level with perhaps occasional increases)? again big differences
There are other things to consider as well. But those are just a few.

Question about the 'golden rule' of paying in to your pension

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