Suggested Pension Contributions

So you’ve decided that now’s the right time to start your pension, but now you’re hit with the million dollar question: What size should my pension contributions be?

It’s a question which you will get a lot of different answers to, but most people will agree that it depends largely on two different questions. How old you are, and how much you want to retire on.

How much difference will waiting make?

First of all, take into account your State Pension, which will pay roughly £100 per week, or £5,200 a year. For every £100,000 of pension fund left over, after you’ve taken your tax free payment, you will currently get an additional £6,000 assuming you purchase a standard annuity at 65. Having paid tax on this income many people will find that they need to save a huge pension fund just to get close to earning the amount they were earning in full time employment. With annuity rates by no means guaranteed (they’ve fallen from 15 to 6% in less than 20 years) saving for your future can become increasingly important and waiting just a year can make a huge difference in the future.

An Example

For example, Peter decides at 25 to save £200 a month into a pension fund. Assuming this fund grows at 5% over the 40 years until he retires the fund will eventually be worth £305,204.03. If he had waited until 26 to start the fund and still retired at 65 his fund would be worth £288,012.97 which is nearly £25,000 less, or roughly £1,500 a year of eventual annuity income.

So clearly the longer you wait to start your pension, the more you will have to contribute each year to end up with a decent nest egg. Some people suggest that for every 5 years you delay starting a pension, you will have to contribute an extra 5-10% of your salary.

Suggested Contributions

These are suggested contributions to leave you with a nest egg that will enable you to continue living a similar lifestyle to the one you had when you retire. The ages are based upon when you start contributing to your pension.

Age 25: 10-12%
Age 30: 12-18%
Age 35: 16-22%
Age 40: 18-25%
Age 45: 25-30%
Age 50: 30-45%
Age 55: 45-70%

Related Articles

What is a Pension?

State Pension – Basics

Personal Pension Options

Company Pension