Pensions in the UK operate as a savings pot that both you and your employer can add money to.
From the age of 55, you can access this money for a regular income.
Since 2017, all workplaces have had to automatically enrol staff in pension schemes.
Employers are required to pay into your pension pot, too – with the minimum requirement being 3% of your wage.
But how much should you put into a pension, and what tax relief is available?
How much should I put in my pension?
‘It really does depend on individual circumstances and expenditure.’ says personal finance expert Salman Haqqi to Metro.co.uk.
‘One frequently cited rule of thumb suggests that you take your age and halve it to calculate how much you should be contributing. So if you’re 32, you would save 16% of your income. Remember that figure includes your employer contribution, too.
‘For many people, however, that isn’t feasible, especially if you’re raising a family, paying for university fees, or planning to pay for children’s weddings.
‘It makes more sense to work how much you can realistically afford to contribute every month.’
According to HMRC, the average amount saved on an individual level has decreased in recent years, despite the fact that more people are now part of a scheme.
The minimum total amount that can be added is 8% of your wage- which means if your employer adds their minimum of 3%, you will have to add at least 5%.
The current average retirement income is relatively close to the average wage in the UK, which is £30,420. When National Insurance and tax is deducted, this comes in at £23,111 – but, crucially, this does not factor in housing costs.
As the current retired generation tend to own their house outright, the net income is extremely similar to that of a working person in the UK (who is likely to be making payments on a mortgage or renting a property).
The amount you should save really depends on your lifestyle, but research suggests a couple would need a combined income of around £47,000 annually to live comfortably. A single person would need slightly less, at £33,000 a year.
What tax relief is available for pensions?
If you pay the money into your pension yourself, you automatically get 20% tax back from the Government – which is added to your savings pot. It is worth checking with your pension provider to work out if you need to claim this yourself.
This is also the case with workplace-backed pensions, but the tax saving might not need to be reclaimed as employers tend to deduct less tax from your pay packet as a result.
If you’re a higher-rate tax payer, you can claim an extra 20% back on top of that. The top rate of tax payers can claim an additional 25%.
It’s worth noting, however, that 20% tax relief doesn’t mean 20% back on your contribution – it’s calculated from your pre tax earnings.
So if you’re a basic tax payer and you invest £80 in your pension, you would have earned £100 pre tax. So the 20% is calculated from this figure – the tax relief if £20.
What is the best way to save for a pension?
Experts recommend you treat your pension like it’s a savings account – overpaying into it whenever you can.
If you’re offered a pay rise or think you can afford to add more, it’s best to contribute more to your pension than increase your regular outgoings.
If you’re self-employed, it’s important to remember to save for a pension if you have the money to do so. 5 million people are their own boss in the UK, and savings for this group are at an all time low according to moneysavingexpert.com.
Independent pensions exist for people who aren’t part of a workplace scheme. You can find independent advice from financial groups like Unbiased.
What should I be wary of when saving for a pension?
Salman Haqqi, who works for money.co.uk, thinks it’s important to remember that you can control the exact amount you pay in.
‘Most pension companies require you to pay between a minimum and maximum percentage of your income each month. However, if you find the amount your contributing each month is too much, you should be able to reduce it to as low as 1%.’
And while there’s no limit to the amount you can invest in your pension, there is a limit on the amount that is tax free. These limitations include:
- Any savings that are more than 100% of your annual income.
- Savings that exceed the personal allowance, which is £40,000 for 2020/21.
- Savings that exceed the lifetime allowance, which is £1,073,100.
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source https://metro.co.uk/2021/02/12/how-much-should-i-put-in-my-pension-and-what-tax-relief-is-available-14065441/
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