Here is a really good question not enough people think about early enough. Research shows that we put ambitious targets on our retirement income and then underestimate how much we need to save to get there.
Before we delve into how much you should be saving, here’s a quick overview of the two main types of pension schemes:
In a defined benefit scheme your employer promises to deliver you an income in retirement. You’ll most likely have to contribute each month too, putting in a required amount.
These ‘gold-plated’ schemes are increasingly rare.
The other type of scheme is a defined contribution scheme. If you have this type of scheme, you will save into this and get contributions from your employer too. The money is invested to build a pot which will then fund your retirement.
If you have a defined benefit scheme, you just need to save as much as your employer says. But with a defined contribution scheme things are a little more complicated… The onus is on you to deliver the money you need in retirement – the more you save, the more you get.
How much will I need in retirement?
In retirement, your outgoings are likely to be lower. For instance, most people will be mortgage free and not supporting children. In the finance industry, there’s a vague rule that some currently aged 40 would need around 50% of their current income to have the same standard of life in retirement.
You should also factor in the state pension. Under the new flat-rate scheme this is worth £155.65 per week (£8,094 per year). So, someone targeting a retirement income of £23,000 would need to contribute £16,000 from their own pensions.
How much should I be saving?
Naturally, the amount you need to save depends on the size of the pension you want. However, it also depends on your age.
For instance, putting 12% of your salary towards your pension might be enough if you start in your 20s, but if you leave it until you’re 40, you might need to pay in closer to 20% to get the same level of income.
It’s sometimes said that the rule for working out what percentage of your salary needs to be going into a pension is half the age from when you started saving. So, if you started at age 30 it would be 15%.
This said, given the variation in salaries and personal circumstances, it can be a good idea to get a slightly more profound insight into your finances.
You could use some sort of pension calculator. There are plenty of different calculators online that let you play around with the numbers. A quick search on Google will reveal plenty.
All things considered, this can’t give you quite as clear a view on your financial retirement scenario as speaking to an independent financial adviser. They should have the knowledge and experience to help you get both a clear view of your current situation and the changes you could make so that your money works harder towards your goals.