How much should I save for my pension?

Research proves 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 provide you with an income in retirement. You’ll most likely have to pay in each month too, putting in a required amount.

These ‘gold-plated’ schemes are increasingly rare.

The other type of scheme is known as a defined contribution scheme. If you possess this type of scheme, you will save into this and get contributions from your employer too. The money in this scheme is invested to build a pot which will later fund your retirement.

If you have a defined benefit scheme, you just need to save as much as your employer says. However, with a defined contribution scheme things are a more complex.Ultimately, 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 very likely to be lower. For instance, the majority of 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 your state pension. Under the new flat-rate scheme this is valued at £155.65 per week (£8,094 per year). So, someone aiming for 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 how big of a pension you desire. However, it also depends on your age.

For example, if you save 12% of your salary towards your pension, it may be enough if you start in your 20s, however, if you don’t start until you’re 40, you may need to pay in closer to 20% to get the same level of income.

It’s sometimes said that the rule of thumb for calculating 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 people’s personal circumstances and salaries, it is certainly good idea to get a slightly more profound insight into your finances.

You could use some sort of pension calculator. There are various different calculators online that let you play around with the numbers. A quick search on Google will help.

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 Leeds. They should have the knowledge and experience to help you build both a clear view of your current situation and the changes you could make so that your money works harder towards your goals.

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James Harrison: James, a supply chain expert, shares industry trends, logistics solutions, and best practices in his insightful blog.