As Financial Advisers, a question we’re often asked is “how much should I pay into my pension?”. The reality is, there is no right or wrong answer! Generally speaking, we’d always suggest paying in what you can afford but there are many questions that should be asked when thinking about ‘the right amount’, such as:
- At what age would you like to retire?
- Will you stop work completely, or perhaps take a part time job?
- What does your current financial landscape look like?
- How much could I ‘afford’ to lock away until retirement?
- How much are you already putting to one side for your retirement?
- What income would you like in retirement?
- Do you have any guaranteed income sources, such as a State Pension, that may help to supplement your income need?
- How many holidays during retirement would you like to go on?
- Will you have any financial dependants throughout your retirement?
The list really could go on! No stone should be left unturned, as failure to do so could leave you and your provisions short of providing you with your retirement lifestyle.
Workplace and government pension contributions
Following the introduction of Auto Enrolment, employers are now responsible for including eligible employees in their company pension scheme. If you’re enrolled in a workplace pension scheme, your employer should too be paying into your pension. Depending on your employer the percentage can vary but under Auto Enrolment, the minimum employer contribution is presently set at 3% of your ‘qualifying earnings’ and the employee contribution rate is set at 5%.
Another added benefit of pension contributions is the tax relief that the Government effectively ‘add’ to your pension fund. The amount of tax relief you receive depends on your income tax rate. As a basic rate taxpayer, this would mean that for every £100 you put in, the Government adds £25. You get tax relief at 40% if you’re a higher rate taxpayer and at 45% if you’re an additional rate taxpayer.
Typically, and for most savers, relying solely on a workplace pension to provide you entirely with your retirement income need is no sufficient and as advisers, we would generally suggest that other provisions are put in place too.
So, what are the limits?
When decided how much to pay into your pension, unfortunately it’s not as simple as ‘paying in as much as possible. There are limits set out, which vary depending on your circumstances. For most pension savers, the current pension contribution limit is 100% of your ‘qualifying earnings’, with a cap of £40,000 (the cap is often referred to as the ‘Annual Allowance’. Qualifying earnings include your salary, overtime, bonuses and commission, statutory sick pay, and any statutory pay received during paternity, maternity or any other kind of family leave.
Very few people are at risk of exceeding their calculated limit, but those that do contribution more than they are permitted to do so, hefty tax charges could be involved.
If, as a saver, you have unused Allowance Allowances from the previous three tax-years, you may be permitted to contribute more than £40,000 in the current year (subject to having sufficient qualifying earnings to do so).
For very high earners who have earnings in excess of £150,000, a tapered Annual Allowance has been introduced which further affects the amounts that could be contributed into a pension.
If you have no income or you earn less than £3,600 per year, your annual pension contribution limit is £3,600, including tax relief.
Calculating what your own personal Annual Allowance is can be tricky as there are many variable factors. Taking advice on such a matter can help to ensure that you don’t experience any costly surprises!
Reviewing and taking advice on your pension savings
It is important to keep an eye on your pension savings, alongside all of your other finances, to ensure that you’re doing ‘enough’ for your retirement. A regular review of your pensions and the contributions going in is crucial to providing peace of mind that your funds are on track to providing you the key to retirement.
The team at Pepperells Wealth are on hand to assist you with achieving your retirement goals and would be delighted to discuss matters on an individual and confidential basis.
Please do get in touch to arrange your free, no obligation consultation with one of our Independent Financial Advisers.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.