How Much Should I Invest in My Pension?
What Age to Start & How Much You Need to Save
ou’re young. You’ve finally started earning money. You want to spend it while exploring the world. A pension couldn’t be further out of your mind.
Or, perhaps you’re worried you missed the boat. You spent your twenties ignoring your impending future and now your chest fills with dread every time you think of the “P” word.
We understand that a huge deal of the avoidance that lingers around pensions comes from a lack of awareness. The task feels too big; where do you even begin? Many know it’s something they should be doing, but when faced with the reality of investing in their retirement they become overwhelmed. They have no idea at what age to start and if they have left it too late.
If this sounds like you and you are wondering how much you should invest in your pension and at what age, then we’re here to help. We want to demystify the confusion of pensions and help you take control of your financial future.
But remember; while advice and guides are a brilliant way to kickstart your understanding and take the first step, there is no better way to maximise your pension than with a Financial Advisor. If you are serious about getting the most out of your money, there is no better investment.
How much should I invest in my pension? To decide how much you need to save in a pension you need to pinpoint what type of retirement you aspire to – whether that be a comfortable or luxurious one – and build your investment plan accordingly. And then the golden rule? Get started as early as possible.
Before you roll your eyes so hard they slip into the back of your head, we do appreciate that the answer goes far deeper. Throughout this article, we will explore the specifics of how much you might need to invest, how you could retire early with a careful saving plan and how a Financial Advisor can amplify the potential of your investment.
How much should I put into my pension?
This is the most common question we are asked when it comes to pensions. Unfortunately, there is no blueprint, one stop answer.
There are a huge deal of factors to consider when planning your pension investments. Do you want to retire early? What is the latest you can handle staying in the 9 – 5 life? What do you want your retirement to look like? How much are you prepared to commit financially?
We know – these questions can be tough to answer; especially when retired life feels so far away. But, if you want to formulate an intelligent plan that doesn’t cost the earth, they’re pretty important to get your head around.
In 2018, Fidelity released a valuable piece of research that caused waves across the industry. They stated that as a rule of thumb, people should aim to save at least 1 x their salary by the age of 30, 3x by 40, 6 x 50 and 8x by 60 so that they could land a 10x investment by the time they were 67.
And while this is a great baseline – and a theory we agree with – the initial impact to the reader proved fairly frightening. What people often don’t realise is that the big, overall number they are faced with is actually a lot easier to conquer than they might think.
It is widely acknowledged by Financial Advisors that the earlier you start investing in your pension, the less impact you will feel on your day to day life. In fact, the money you invest in your twenties and 30s has a huge role to play in your 50s, 60s and 70s.
This is because you are giving yourself more of an opportunity to grow your funds. It is your bread and butter, and will stop you from relying on huge, uncomfortable investments or an (unfulfilled) hope of a whopping windfall in your later years.
But the real beauty of putting money into your pension from an early age, is your money will work hard for you, rather than the other way around. This, in turn, will contribute to your decision on how much you personally need to invest year on year.
Because, did we mention? Your pension is made up of so much more than your personal cash. There are added bonuses and tools to help you reach your wealth goal with greater ease.
As soon as you enter employment, you can benefit from the Holy Grail of pension investments: employee match funding. Following the auto-enrolment of workplace pensions rule, all employers are now required to contribute to your pension payments. Basically, free money. The more you give, the more they’ll match.
Plus, any payment you make into your workplace pension will come out of your gross pay, making it far more digestible and barely even noticeable. Picture it like your phone bill – it goes out before you even knew it was there.
On top of that, the Government will top up the tax on your payment (this is called tax relief). This is calculated based on the highest rate of tax you pay – for a top rate taxpayer, this can result in a substantial increase. For example, a top rate taxpayer could invest £55 into their pension and expect £45 added to their pot. Multiply that by the years of investment and you could find yourself sitting with a very extravagant retirement.
There is also a real benefit in setting up an automatic increase in your pension payments every year. Even an increase as gentle as 5% to follow inflation can ease the stress of saving, and help you reach your end goal quicker.
How much you need to save in a pension to live comfortably
A comfortable retirement will mean something different to everyone, but it is generally agreed that a £210,000 pension is a safe figure to aim for.
Of course, the longer you wait to start filling the pot, the higher your contributions are going to have to be. In context, the contrast between someone in their twenties and someone in their fifties starting to save for this level of pension is almost five times as much. It’s the difference between £131 and £633 every single month: now are you starting to appreciate the benefits of putting on the pension hat early?
How much you need to save in a pension to retire early
Saving enough money to close the door on employment and kick your feet back in the sunshine is the dream. With clever investment and a strategic plan, that dream can easily become a reality.
It is possible to retire at 55 with a £300,000 pension; if you have other assets or are happy to live on £10,000 a year. If not, you need to figure out how much you need to live within your means and work backwards – luckily, we’ve got the world’s easiest retirement calculator to help you with that.
The benefit of getting this right is major, as your pension can be a serious capital growth producing asset. Save enough money, and you will actually earn income on your pot and sustain a lifestyle that has you jumping out of bed in the morning.
How much can I invest in my pension each year?
As your pension is a tax efficient savings scheme, there are limits on how much you can invest into every year.
For the purposes of tax relief, you can contribute up to 100% of your earnings each year or up to the annual allowance (which is currently £40,000). This is the TOTAL sum, including your personal contributions, those from your employer and government tax relief.
If you earn over £200,000, you may however be affected by changes to the tapered pension allowance; this reduces the amount you can save into a pension and still receive tax relief.
If you are a non-earner, the rules once again differ slightly. For those with no earnings or who earn less than £3,600 a year, it is still possible to pay into a pension scheme and gain tax relief (up to a certain amount). The maximum you can pay is £2,880 a year – this would then be bumped up to £3,600 through the tax relief.
What age should you start paying a pension?
The simple answer? As soon as you can!
You don’t need to have a high-flying career to commit to your future wealth – we would encourage everyone to get started as early as possible. So whether this is when you get your first part-time job or even a paper round, every contribution will make your investment journey as comfortable and with as little impact on your day-to-day life as possible.
What age can you start paying into a pension?
If you want to reap the rewards of a workplace pension, auto-enrolment applies to workers aged 22 or over. However, if you’re younger and earning £6,240 or above, you still have the opportunity to opt in and benefit from the extra money from your employer.
Remember, you don’t need to wait for a workplace pension to start your retirement savings. Anyone under the age of 75 can pay into a self-invested personal pension (SIPP). Even if you aren’t earning, you can contribute up to £2,880 net each tax year and still receive tax relief.
In addition, parents are able to open a Junior SIPP for their children which can then be accessed when the child is 55.
How you can retire early by investing
If you’re sitting there daydreaming about Mojitos on the beach and a bucket list full of ticked boxes, then you need to make sure your retirement investments are smart ones.
That means putting in the pension work that allows you to step into early retirement. While the best way to make this possible is by starting your savings from a young age, there are many other tips and tricks that will allow you to maximise the return on your investments.
Your best bet? Professional advice.
Why do you need a financial advisor?
A Financial Advisor will have the primary aim of helping you build wealth and retire on a high.
- Plan and strategise your investment journey and ensure your portfolio is fit for purpose
- Set you clear goals and help you review and assess them
- Assess and avoid risk
- Keep you on track when all your senses are pulling you away from the track
- Give you total peace of mind
Plus – investing in a Financial Advisor can actually make you more money.
“Financial advisers can prove invaluable when it comes to making complex financial decisions. A huge part of what I do is to help people understand what is truly important to them, set goals and then STOP them making decisions that will take them further away from those goals. As human beings, we can make some pretty irrational decisions, especially when it comes to money… That’s where my impartiality really helps. What I do goes far beyond simply choosing an investment portfolio – although my experience and expertise definitely come in handy there too!” – Simon Garber
How much will the advisor cost?
Here at 2020 Financial, we offer a competitive, fee-based price for our financial planning and investment services. We’ll tailor this around what you need and will always give full details of costs prior to delivering any advice.
To find out more, drop a member of our friendly team a line. We’d love to find out more about you.
About the Author
Simon Garber DIP PFS is an Independent Financial Advisor and Qualified Pension Transfer Specialist. He is the Managing Director and Founder of 2020 Financial, based in Southampton, Hampshire. Simon specialises in Pensions and Retirement planning and is a later life planning specialist. He also holds qualifications in investment and life insurance and is a member of the Personal Finance Society and Chartered Insurance Institute.
Simon is passionate about providing the highest standards of customer care and transparency. 2020 Financial were awarded the Pension Gold Standard in 2019. You can find out more about Simon here.