For most people, your quality of life in retirement depends almost entirely on your pension. The more you save and the longer you save for, the more comfortable your retirement could be. So putting away enough money from an early age – and keeping that going – is crucial. But how do you know what “enough” is? Here’s what you should consider.
How big should my individual pension pot be?
Fidelity estimates that saving 7x (times) your annual income by age 68, together with the state pension, should maintain a similar standard of living in retirement as in working life. So, for someone on a £50,000 salary at retirement, that would mean a final pot of around £350,000 in today’s money.
Your final pension pot value will also depend on what sort of lifestyle you want to lead. Do you expect your expenses to decrease or increase? Perhaps you want a comfortable retirement with more holidays and hobbies? However you want to live in your retirement, this will impact your spending. Fidelity indicates what you might need for different lifestyles.
How much should I save each year?
13% of your annual income before tax. This is one of Fidelity’s rules of thumb for what you should be saving into your pension if you start at 25 and save till you’re 68 – this includes your workplace pension contributions. If you’re 30 and just beginning to save, this increases to 15%, and by 35 it jumps to 18%.
So if your combined pension contributions at work are 8% of your earnings, you need to top up with at least another 5% into that pension or another pot. If your income is £50,000, that means saving £2,500 a year – or £208.33 a month – on top of your work pension. If you are starting later in life and saving a total of 18%, this increases to £416.6 a month additional to your workplace pension contributions. You can also try the Money Advice Service’s Pension Calculator to find out how much you should be saving.
How should I pay into my pension?
Outside of workplace pension contributions, which are taken from your salary, paying in monthly through a direct debit or standing order is a good way to ‘set and forget’. The Moneybox Personal Pension allows you to pay into your pension via weekly, one-off or monthly payments via direct debit. You can even round up your everyday purchases and save the spare change directly into your Moneybox pension!
If you’re self-employed or have variable income, setting up a direct debit from your main account may be difficult. It’s tempting to wait until you have some spare cash at the end of the month instead, but unless you’re consciously saving, you could be waiting a long time! In the meantime, you could be missing out on vital gains in your pot. You could look to build up your pension savings into a cash savings account that pays some interest and then drip-feed into your pension from there when it’s right for you.
What happens when I reach retirement?
A defined benefit pension, linked to your final salary, will pay out from when you start retirement until you die. For other types of pension there are a number of options when you reach retirement (55 is the current minimum pension age for workplace & personal pensions):
- Leave it where it is – if you have a defined contribution pension and want to delay retiring, you can keep building your pension pot until you are 75.
- Take 25% as a cash lump sum – you can usually withdraw up to a quarter of your pension as a tax-free lump-sum. You can withdraw more than 25% as cash, but you will be taxed on this. The rest of your pension pot you could either leave where it is, or use some or all of it for one of the options below.
- Buy an annuity – an annuity is a product that provides a guaranteed income. There are different types of annuity you can buy depending on your personal circumstances.
- Invest in drawdown products – you can transfer your pension pot to one or more funds that aim to provide a regular taxable income. The income you receive may be adjusted depending on the performance of your investments.
- Fidelity’s golden rule of drawdown is to take only 4-5% of your pension a year as income. That should mean the money you take out, may come mostly from investment returns – not from your original capital.
As things stand today, whatever capital is left in a self-invested personal pension can be passed on when you die (subject to tax rules).
Please note Moneybox cannot accept a transfer from a pension your employer is currently paying into or a pension with guaranteed benefits. Remember, you can’t withdraw from your pension until you reach the minimum pension age (currently 55).