/ Money

How much should you be paying into your pension?

Treasure chest against blue background

There’s been a lot of noise about how much to pay into your pension this year. We’re all getting more freedom in how we spend our pension pot when we come to retire. But are we saving enough?

Figuring out what the changes to pensions mean for you is one thing, finding the money to put away to build a pension fund is another.

Our new pension guide, looking at how much you need to save, is designed to help.

We asked our members how much they thought they needed to live on for a comfortable retirement. The average amount was £18,000 per year.

Similarly, a NEST survey showed that pensioners’ sense of satisfaction with life increased markedly for those with income of £15,000-£20,000 and above.

So, how much to pay into your pension?

So people have pretty high expectations of what they’ll need in retirement.

We calculated how much you’ll need to start saving at different ages to have £15,000 or £30,000 per year in retirement. This included the state pension and assumed that you’d get nothing in the way of company contributions.

How much do I need to save for my pension illustration

At 35, you’ll need to squirrel away £215 a month for £15,000 and £654 for £30,000. By your mid-40s, you’ll need to be saving £322 and £981 per month respectively.

The state pension counts for a smaller proportion of the £30,000, so the savings needed are three times, rather than double, those required for £15,000.

The numbers are quite scary. With all the will in the world, is it possible to put these amounts away each month for a happy retirement with all the other demands on our income? Or is this just the new reality?

Peter Clifton-Dey says:
16 October 2014

It would be interesting to know how these figures are worked out and from what kind of pension scheme. Can you recommend the best, most secure scheme to use and maybe one that has a little risk but good returns

Martin Millen says:
20 March 2015

The answer to this is different for everyone and depends on many factors. If you want to get the best answer you should speak with a professional independent financial advisor, most independent advisors will provide an initial meeting at their expense so that you can both decide if it is in your best interest to pursuit the advice given 🙂

The moral of this is: don’t wait until you’re thirty-five before starting to save for a pension. Starting early with a small percentage of your gross income will be better than trying to catch up later. Outside the public sector there are very few schemes with employer contributions and virtually none that will be based on your final salary or with benefits that are guaranteed to track inflation. Therefore, an illustrations such as the one in the intro, frightening though it appears is probably entirely realistic.

John Ward, most. if not all, work-based pensions will have a contribution from the employer. They will just not be based on final salary when the time comes. It’s time public service pensions took the same structure so the rest of us will not be subsidising “gold-plated” final salary pensions. Those days are gone.

Thanks Malcolm – I was getting a bit confused and making the situation seem worse than it actually is. A few years ago, many companies – with what they were advised were excessive pension funds – decided to take an employer’s pension contribution “holiday” and stopped making [or substantially reduced] payments into their funds with the result that many funds ran into deficit. This has been bearable if the company survived because the funds are being replenished [but not necessarily to the same extent] and new, less favourable, schemes were introduced for new recruits. However, many firms have been taken over, gone into administration, or were liquidated during the recession and the residual pension funds are no longer adequate or have been closed. In most cases for people who had already retired and were drawing a pension the Pension Protection Fund would continue to pay the pension but working employees caught by the closure are not so well protected [as well as probably having missing years until they could get back into a pensionable job] and those in schemes that were not eligible for this protection might have lost their pension altogether or receive only a partial payment. This Conversation is obviously aimed at working people who are not in a company pension scheme but even if they eventually join a company scheme they should be aware that what happened before could happen again. It is best, therefore, for people to start making provision for retirement as early as possible so that if things go wrong down the line they will have something to fall back on. I realise that with all the other claims on peoples incomes, especially housing, making a hefty financial commitment to such a long-term thing as a pension does not seem so compelling. Many people living in high-value property might be regarding their home as their pension pot as they intend to move to a lower value property and invest the difference; I’m not sure that is a prudent plan either but maybe I am just too pessimistic.

I agree with you Malcolm on public sector pension schemes which are now completely out of line with conditions for people outside the public services. It used to be argued that the general pay and conditions package in the public sector was inferior to that in commercial and industrial employment but I suspect that has not been the case for a long time at any level; certainly the upper levels seem to be very well compensated for their endurance and the lower levels usually enjoy pay and conditions of service significantly better than the local average [national pay scales ensure that is the case in most rural areas]. There seems to me to be no justification for the perpetuation of final salary pensions since the ever-rising cost of the employers’ contributions to meet this liability is a priority charge on the Exchequer, on council revenues, and on other public services. Ultimately this is a tax on the working population who might not be so well treated, and on business.

John, when people join a pension scheme that simply builds a pot of money – not final salary – as far as I am aware both parties, you and the company, contribute but the money generally goes to a pension provider like an insurance company so is protected. The company cannot interfere with past contributions.

I am sure that is almost always the case but funds can be depleted if companies take a contribution holiday and if management expenses are too high. Presumably fund performance can also have an impact on the ability of a fund to meet its future commitments. Perhaps I shouldn’t have raised this as it’s getting away from the real issue which is getting people to realise that they really do have to make substantial contributions throughout their working lives [which now sometimes don’t start until their mid-twenties] if they are to have a reasonable lifestyle after retirement.

You may find this website helpful too: http://www.guidetopensions.co.uk/

How much you need to save for your pension depends on how much your annuity will cost you (assuming it’s a market purchase pension and not a final salary scheme). When I had a look at typical annuity rates recently, I was horrified! I felt sure I could do better myself just by putting the pension in a high-interest savings account and then drawing an amount that will last until I’m 100. I would get even more if I took a small risk and invested a small percentage of that on the stock market, and some more in bonds – effectively what an annuity provider would do. The annuities seem such a rip-off. It’s a good job nowadays we are not forced to buy an annuity but can instead elect to put our pension savings into a SIPP (self-invested).

I have to say I am a bit shocked by this article.

In 33 years time £18K or £30K will not be buying a lot. Could you please make explicit whether we are looking at actual income, or the equivalent purchasing power 33 years hence.

It’s worth clicking onto the link to Which?’s new Pension Guide [see 3rd para in main article above]. It says that the calculations are based on today’s money. Actuals will obviously depend on inflation and interest rates over the relevant period.

Hi dieseltaylor. Looks like John Ward has already given you the answer 🙂 But just to reiterate, the values in the calculation are at today’s price, so inflation will impact both contributions and final income in retirement. Thanks, Alex

Thank you for both your replies. As I said the Conversation piece itself does not provide that information and from my experience of pensions advice and people I think it best to be explicit.

Much as I dislike annuities etc. I am filled with trepidation at the thought of the huge number of people who will be making major financial decisions where they can access large sums early in retirement. A large amount of my time was spent helping people budget their money for life over a 12 month period – I wince at what I forsee in the future.

Incidentally if we revert to durability of products once you are ekeing out a pension paying for new washing machines, TV’s, mobile phones , and renting your broadband as the link with all the Governments and companies official sites I see as a problem.

renniemac says:
17 October 2014

I worked in the Health service as a nurse for 30yrs. I had to stop working as my back was so badly damaged from the years of heavy lifting (no lifting aids then) my monthly salary was a pittance for the unsocial hours I worked, I wont access my pension at the moment as a don’t want a reduced rate. preferring to wait 4 years. but this pension is no silver lining or as Malcolm r suggests gold-plated. I will be lucky to clear a £1000, a month. this is a joke for the years I paid into it. my pension with health service was not based on final salary.
my husband on the other hand worked for Glasgow district council 39 years, he took early retirement last year, his was based on final salary, but as far as I know newer employees don’t have this on retirement. my husbands pension is £16000, per year, but he worked damn hard doing an awful job to warrant this. I think in an ideal world every one should have final salary pensions as these rise with inflation, and keep up with changes in the market. I think it is disgraceful that employers are not forced into pension provisions for their work force,
after all employee commitment to their employer should be rewarded for loyalty. I was somewhat naïve to think everyone received a works pension. but I am learning the realities of this. but please stop with the gold-plated, this only applies to consultants and trust managers and the upper case. the ground force workers in the health service are lucky if they can live off the pension given

The amount you have to pay shouldn’t be scary, but reality sometimes is. As a starting point here is a very simple calculation. Assuming no inflation or interest, and that you earned the same salary for 40 years, you have to save 25% of your income throughout that time to get a pension of half pay for the next 20 years. It’s small wonder that most funded CARE schemes (there are very few final salary schemes left now) cost over 20% a year.

If people decline to commit to that sort of level of contribution they shouldn’t be envious of those who do and, out of blind jealousy, demand that such schemes be abolished.

Basically we have two problems. Firstly we need to make sure that everyone who is working is contributing a sensible amount towards a pension scheme. Secondly, pension funds need to be protected to ensure that everyone contributing does receive a sensible pension, irrespective of what happens in future. It’s no good if the goalposts are moved once people are retired and probably unable to do much if there are problems with their pension scheme. Present and future governments should take responsibility for this.

We should first of all put public service pensions on the same basis as private ones – a contribution from employer and employee that provides an invested pot of money from which the pension will be drawn. We cannot subsidise certain schemes from hard-pressed taxpayers.

Any invested money will be subject to the ups and downs of the equity and bond market, so final pensions cannot be guaranteed – a fact of life. We cannot support these schemes from the “government” – that simply means you and me, the taxpayer as there is not some reservoir of money to raid.

If there is a fall back it has to be onto the state pension, and that should be properly funded – maybe we need to trim back our defence budget, foreign aid, over-generous benefits, to put money where it really counts. It may need an increase in taxes. But we will get nothing for nothing and unfortunately in times of economic hardship we may all have to accept a bit of a hit. Unless someone knows where else the money will come from?

If public service pensions are better then perhaps we should bring other pensions up to the same standard. Instead of all the perks that many receive working in industry, the money could be ploughed into providing better pensions.

It is vital that all pensions systems are made financially sustainable so that those who retire in the future are not short-changed. We have to cope with increased life expectancy and not use this as an excuse for inadequate pension provision.

I applaud the sentiments expressed. However I am not convinced, with the exception of Norway and perhaps another couple of countries, that it is possible to construct a pension system that will prevent hardship to future pensioners. The following may seem slightly gloomy but if we are talking about 20- 30 years into the future for pensions it seems only fair to consider what the living standards might be.

Expanding populations will require food and unless there is some major changes in agriculture [50% of grain feeds livestock currently] and fishing I can see a future of rising food prices. The comparative wealth of European nations compared to the rest of the world will not necessarily exist when it comes to purchasing power.

If the state who is going to provide the fallback position for the elderly distressed is to be able to afford the requirements perhaps we had better look at almshouses and minimum standards that will be offered.

And more importantly how inheritance is dealt with whereby the state may have been providing many expensive services to a resident who chooses to remain in their own house and on death the value of the estate goes to the family. Hardly a vote winner to tackle but we do seem to pussyfoot around planning twenty years plus into the future.

The National Health Service is a wonderful thing but it has suffered a huge mission creep without serious consideration as to whether there is actually a danger in having a vast workforce who effectively produce nothing that can be sold.

It is time that we wake up to the problems you mention, Dieseltaylor. However, I would not undervalue the NHS. What they are doing is important – far more important than generating economic wealth. Most of us are too obsessed with material possessions as measures of achievement. I believe that this is going to have to change. The government needs to ensure that the value of pensions is protected.

some public service pensions are better because they are over-subsidised by the taxpayer (who are either struggling on their own pensiuon or struggling to save for their future pension). That is unfair on everyone else. Such final salary schemes are no longer affordable.

We could also reconsider professions that give pension at an early retirement age. Many privately-employed people have hard working lives and must carry on until the normal retirement age. Jobs with lighter duties, if necessary, could be provided until full retirement age is reached.

An advantage of final salary pensions schemes is that they offer more certainty about the future. The problem is that with people living longer, on average, the contributions need to increase to make them sustainable. If that can be done, why do we need to phase them out?

The uncertainty lies in how much you would need to contribute to provide a pension based on your salary up to 40 years or more ahead. if the pot is short, private companies will need to either find resources and maybe endange the whole business, or seek government help (money from other hard-pressed taxpayers) and for public pensiuons once again the money would come from you and me.

We need to educate people to think about their future retirement and to make realistic contributions. It may be that when the time comes our standard of living may not be what a generous final salary scheme would have given.

The charges made to invest and administer pension schemes should demand legislative attention – they currently can make substantial money for the scheme providers at the expense of the contributor. This must stop.

If I recall correctly one Governemt decided to tax Pension funds …to raise money for the “now” a couple of decades back.

Ah! ” Pension funds have lost between £150 billion and £225 billion as a result of the pension tax grab in the 1990s. …….

renniemac says:
22 October 2014

May I make it quite clear, the hard pressed tax payer doesn’t blink an eye when people become nurses and receive below average working wage with unsocial hours to boot, but they do object when “hard pressed tax-payers foot the bill” well no, I had paid into the government scheme, my pension is not given to me on retirement free, as some think. don’t make judgement without knowing the truth. Government ministers tell you something and you believe it. there are no gold-plated pensions for Nurses, Porters Kitchen staff nor cleaners. we have all paid into a pension plan which is totally inadequate when retired, the shortage in Pension funds is not the fault of public service workers it is the fault of the likes of Gordon Brown who pillaged the pension pot, leaving some having to go back to work. so come on folks stop using public service workers as scape goats.

renniemac, if you look at my earlier post it says ” some public service pensions”. As in the public sector there are many in the private sector on low-paid hard jobs. I see no reason why the majority of pensions should not all be put on the same basis of balanced contributions from employee and employer into an invested fund from which the pension can be drawn.

renniemac says:
23 October 2014

I agree Malcolm r, everyone should have a decent pension, if you have worked hard all your life and have contributed to a works pension it should be sufficient enough to give you a decent living. this subject is a bit titchy for me, I was nursing for over quarter of century, only to find my pension is awful. which I have decided not to access until my 60th in 4years time. I did leave works pension in 80s as at that time if anything happened to me my husband was not entitled to my pension, so there was a mass exodus of nurses from work pension. they soon changed their stance and we all went back, I won re the move because private firm said they were better, when they were not. I wanted bought back into my works pension as if I never left. I am just so angry that you work hard, do the right thing, join work based pension be it public or private pension only to find it is disgracefully inadequate.

There is so much good sense coming through this Conversation from other contributors and a number of thoughts come to mind :

a. I think the term”gold-plated” has been over-used by the media to apply to any public sector pension. I think its original use was in relation to the non-contributory and relatively beneficial pension scheme enjoyed by members of Parliament, many of whom were also found to have been milking their expenses system.
b. Most people in the public sector have had to pay in 5%,6%, 7% or more for their pensions but this has clearly been inadequate because their public sector employers have had to make bigger and bigger contributions [12%+ and rising] from Exchequer and Municipal taxation in order to meet the “final salary” obligations.
c. “Final salary” schemes only ever pay a proportion of the actual final salary [or best of the last three years perhaps] and it depends on the number of contributing years; someone with only thirty years’ contributions would get much less in retirement than someone with forty years.
d. The problem for the vast bulk of public sector workers has been that they are often in low-paid jobs [like cleaners] or under-valued jobs [like nursing] and – for perfectly valid reasons – have stayed at that level throughout their service. Their final pay level is, in real terms, often no higher than their entry level. Pension schemes seem to be based on the concept that everyone will rise up the hierarchy and have a comfortable retirement.
e. Low-paid work is often back-breaking or involves unsocial hours and can lead to premature termination of full-time employment. Half of a low pay level multiplied by thirty years will not produce an occupational pension fit to live on decently. Low pay does not allow people to make much additional provision through savings or life assurance.
f. I guess half the women employed in the public sector are working less than full-time so have even less to contribute towards their pensions. They have generally had an interruption in their contribution record. Men, on the other hand have bagged all the full-time work, stayed in their job throughout, and had opportunities for advancement. Many part-time workers exit their schemes and reclaim their contributions because they need the money now rather than a meagre stipend at a future date they fear they might not even reach.
g. While there are persuasive arguments in favour of putting public sector pension schemes on the same footing as good private sector money-purchase schemes, this isn’t the current policy: public sector schemes are progressively moving to a “career average” basis rather than “final salary”. Although this could be detrimental for many public employees, the Pensions Policy Institiute considers that, notwithstanding this change, public sector pensions will continue to be superior to most private sector “money-purchase” schemes. So an element of inequality will persist, taxpayer funding will continue to be required, and the invidious debate over the merits and value of the public sector schemes will run and run.
h. While not gold-plated, public sector schemes are certainly copper-bottomed in that they are reliable, guaranteed, usually index-linked, and – taken together with all the other conditions of service – relatively generous on a like-for-like basis.
i. A huge number of the tradional public sector jobs have been privatised and, after an initial period of continuity without detriment, have eventually ended up with much worse terms and conditions. Those that remain – mainly clerical, administrative, managerial and professional staff – are probably now in an even more enviable position overall than their private sector comparators since, wherever they are based, they enjoy national pay scales unrelated to the local going rates while their colleagues in metropolitan areas are compensated for their higher housing and travel costs by “weighting” allowances or higher grades for equivalent work.

Nothing is more vital than starting a pension as soon as possible after leaving full-time education but nothing is less well-understood or as compelling alongside the other claims on people’s incomes.

Alas some of us can’t afford to pay into a pension scheme at any age!

John Ward
“b. Most people in the public sector have had to pay in 5%,6%, 7% or more for their pensions but this has clearly been inadequate because their public sector employers have had to make bigger and bigger contributions [12%+ and rising] from Exchequer and Municipal taxation in order to meet the “final salary” obligations.”

Exactly the point. In the private sector many employers rarely pay anything like this level of contribution, whilst employees pay the same or even more. So the taxpayer ends up funding the bill – in the instances you quote. In additiion of course they will also draw a state pension.

If you can propose a way where everyone gets a decent pansion, irrespective of how much they have earned or contributed, I’d be interested to know. I cannot see a way of funding this without ensuring people put aside adequate contributions (difficult or impossible when you are low pay) or a huge subsidy from taxation.

We do not need to draw a distinction between the types of jobs in the private and public sector – they are broadly comparable in terms of physical effort and stress, so employment terms should be on the same basis – including pay, redundancy terms and pension structure. My view anyway.

Trade Unions had a large part to play in securing good pensions for their members and that is why public sector workers had final salary schemes after the private sector. I don’t think many private sector workers belong to a trade union and their conditions reflect this – unless they are in the £100k+ salary bracket then they have a financial and pensions adviser. People are not willing to pay TU subscriptions and scoff at the idea of belonging to one and yet they point fingers at those who reap benefits from belonging to one. I became a member of a TU at 21 and I am still a member, now in retirement and at reduced fees. I also joined a pension fund at 21 and have a reasonable pension although I retired early and have to wait until 2016 for my state pension. Luckily I had paid off my mortgage before I was forced to retire or I would have to give up my car.

John Ward was correct in saying young people must start paying into a pension scheme as soon as they start work. I know it is going to be very difficult for the 5 million earning less than a living wage but even if they start with a small % and increase their contribution as their earnings increase they will become accustomed to saving for their distant retirement. So many people today only start to think about a pension when they reach forty or so but with the pensions available today and the poor value money purchase schemes this will not give them a comfortable retirement. Also, the Government can’t be relied on to pay more than the state pension and I dare not guess at what level that will be in twenty five years time. I am so pleased that I’m a baby boomer!

Too right Figgerty. And we must not be suckered into the idea that employers contributions are somehow a drain on the taxpayer. As far as the employer is concerned it’s part of the cost of employment, along with NI and any number of allowances. Just because it has ‘pension’ and ‘public sector’ written on it doesn’t make it a subsidy. And as far as the employee is concerned it’s part of the employment package.

The only way you’ll get people to take part in occupational pension schemes is if it’s mandatory for employers to contribute at least matching funds so that people see it as ‘free’ money.

I well remember the threats of strike action by the public service unions if their members pensions were revised for the future. Those without this kind of “strength” are put at a disadvantage, as you say. Not a happy state of affairs.

Rather than change what is happening in the public sector, why not get the private sector up to speed?

It’s important that the future value of pensions is protected so that people can plan for their retirement.

wavechange, I’m not sure what “up to speed” means. If you want increased pensions then employers and employees must contribute more, unless you can suggest another means of paying for them. Money purchase schemes depend upon stock market and bond performance. Final salary schemes also but, as they carry an indeterminate future cost, may well require topping up – guess where the money comes from.

Malcolm – As I’ve said before, I’m in favour of final salary schemes because of the greater certainty provided for the individual. Obviously they have to be funded properly, taking into account that people are on average living longer.

Industry needs to do more to provide employees with a fairer share, rather than having those at the top with fabulous salaries, perks and pensions while paying others a pittance.

I’m glad I worked in the university system, which is neither private or public sector.

wavechange, with the uncertainty of how much needs to be provided to pay for final salary schemes, how do you propose funding them?

One way that this could be done is to get rid of the employee’s contribution and make the provision of a pension the responsibility of the employer. Obviously salaries would need to be decreased to offset the removal of the employee’s contribution.

This does not address the uncertainty of how much to set aside. Prices will increase if the employer funds the whole of an enhanced pension scheme – or taxes in the case of the public sector. Someone has to pay and, in the end, it is us. No magic pot of money. Are we prepared to pay higher prices and more in tax? And take reduced pay as you suggest?

I regret to say that despite all good intentions that there is not an iota of a possibility that you can guarantee a good pension [retirement] for the vast majority of the population.

Setting aside the spectres of rampant inflation, currency devaluation, disease flood and famine there remains the twin evils of a limit that an economy can afford, and rising expectations of what people have a right to.

As has been correctly pointed out we have an increasing number of people who have jobs but only have minimal pay. This is unlikely to change other than to worsen as jobs are de-skilled or out-sourced.

To talk of firms paying pensions as part of the salary rather ignores the very frequent threads here on how much cheaper stuff is from the US etc. All we would do is kill many remaining firms in the UK and increase the unemployment figure. Whether we like it or not there are global markets and if GB Ltd competes poorly then the country suffers.

I cannot suggest a solution but what I think we need to do is have a reality check .
This may mean now , in 2014, we actually outline what we can do for the poor in 2030-40-50. Basically no one will starve and you will have a place to sleep and keep warm and this will probably be something akin to almshouses.

Everything else people want in retirment they better start saving now as every bean they spend on lattes, holidays, apple devices and expensive hobbies is a deliberate choice of fun now and the State will provide for my future.

The nanny state was for a brief couple of decades able to promise everything and it seemed possible. The breakdown of family ties and localities did not matter but I am afraid that those days are hugley unlikely ever to return.

BTW there is one other point. The rise of the multi-nationals and the concentration of vast wealth into a few hands needs to be addressed as the distorting effects can affect us very directly. For the US mega corporations have 1.8 trillion dollars sitting off-shore avoiding paying tax. No doubt we have British companies also but the immediate effect is the large funds off-shore help US corporations be cheaper in the market place.

Amazon avoids around £33m of tax per year according to the Guardian – so roughly 1000 trained nurses for the NHS.

“In 2011, states lost approximately $39.8 billion in tax revenues from corporations and wealthy individuals who sheltered money in foreign tax havens. Multinational corporations account for more than $26 billion of the lost tax revenue, and wealthy individuals account for the rest.
$39.8 billion would cover education costs for more than 3.7 million children for one year.
This sum is also roughly equivalent to total state and local expenditures on firefighters ($39.7 billion) or on parks and recreation ($40.6 billion) in FY 2008.
Table ES-1 lists the top 10 states with the most revenue lost to tax haven abuse.
Some of the largest companies in the United States use tax havens, including many that have taken advantage of government bailouts or rely on government contracts. As of 2008, 83 of the 100 largest publically traded corporations in the United States maintained revenues in offshore tax havens, according to the Government Accountability Office.
At the end of 2011, 290 of the top Fortune 500 companies using tax havens collectively held $1.6 trillion in profits outside the United States—up from $1.1 trillion in 2009—according to Citizens for Tax Justice.

Prices will not increase if the employer takes over the employee’s contribution and the salary is adjusted to compensate.

People who have retired deserve to know that the value of their pensions will be maintained, so an indexed system is necessary.

Perhaps what we need is a radical change to the pension system. For example, make the State Pension significantly higher for all to give a proper basic liveable income- funded from taxation, employer and NI contributions. Then let individuals save what the can afford and when to give a separate pot for their retirement, but no tax releif – let that saving go into the State Pension.

The point about tax relief on pension contributions is that you pay tax when you draw it out. It’s not a great incentive to tax the money twice.

Invest your pension savings in tax free vehicles – stocks and shares ISAs for example – for no tax on the income or gains. A pension is a good time for income to be tax free – unlike at present.