Have you spent much time thinking about your pension? You’re hopefully reading this article because it’s on your mind. And that’s a good thing. Because the earlier you start pension planning the better.
In this article, our expert team of independent financial advisers at PIL Southampton answer the questions clients ask us every day about this important topic that affects us all.
It’s never too late to start saving your retirement, though it’s fair to say that the earlier you start the better. Research by Unbiased highlights that 17% of over 55s have no pension provision in place, apart from their State Pension.
Someone who starts investing in a pension in their 20s will have to contribute much less to build the same retirement pot as someone who doesn’t start saving into a pension in their 40s.
As a rough guide, someone who saves £100 each month into a pension from the age of 22, will have accumulated £175,500 from their £51,600 investment by the age of 65. Compare this to someone who doesn’t start saving into a pension until they’re age 40. If they save £200 each month, by the age of 65 they will have invested £60,000 but will only have accumulated a pension pot of £117,000. (For illustrative purposes, we’ve assumed an annual growth rate of 5%). These are illustrative figures only and do not account for inflation, charges, or investment risk.
The lower the amount you regularly pay into your pension, the less impact it will have on your disposable income. And, crucially, cumulative interest means that the longer your pension savings have to build up, the more your savings should exponentially grow over that time.
As a rule of thumb, it’s suggested that you have one year’s annual salary saved into a pension by the time you reach 30, to give your pension fund the opportunity to build substantially between then and your retirement age.
As well as all the benefits of building a healthy pot to fund your retirement, including giving you a comfortable lifestyle and reducing financial stress in later life, pensions are one of the most tax-efficient ways to save for retirement.
The government gives UK taxpayers tax relief on the money you pay into your pension. In the 2026/27 tax year, the tax relief allowance on your private pension contributions is 100% of your annual income, or £60,000, whichever is the lower amount.
Note: Pension contributions made after you reach the age of 75 are not eligible for tax relief.
Tax relief makes pensions a great way to save; if you’re earning £30,000 annually, for example, with the minimum 8% contribution, a £200 contribution to your pension pot would only ‘cost’ you £160 when you take tax relief into account.
With a workplace pension, you may receive tax relief at your highest rate automatically, depending on how your employer’s scheme is structured. If your contributions are taken after tax (known as ‘relief at source’) your pension provider will add the 20% basic rate tax relief to your pension pot.
Higher-rate and additional rate taxpayers in a ‘relief at source’ pension scheme will need to claim the extra relief via self-assessment.
You should ideally start saving into a pension as soon as you start working. This is because the earlier you start, the smaller the percentage of your earnings you’ll need to put aside to build a substantial pension pot for your retirement.
Saying that, don’t be discouraged if you’re in your 30s or 40s and you haven’t started saving into a pension yet. You still have time to significantly increase your retirement income.
However, we advise you to make a start as soon as possible, as the quicker you start making contributions the more chance you’ll have of making up the shortfall.
For many people, your 30s can be a particularly financially demanding time, with a mortgage and childcare and all sorts of commitments but putting aside even a small amount into your pension will make a substantial difference in the long term.
Treat your pension contribution like any other bill that needs to be paid. And regularly review your day-to-day budgeting; you might find that you are paying £30 in monthly subscriptions that you wouldn’t miss if you cancelled them, and you could pay that into your pension instead.
You can also set up automatic contributions to your pension plan, deducting a fixed amount from your salary before it hits your account.
You should save as much as you can practically afford, without leaving yourself short day to day, and making sure you keep enough money to take care of any unforeseen circumstances whether it’s a new boiler or tiding you over if you lose your job, for example.
A handy and simple formula is to halve your age and use that figure as the percentage of your annual income you should aim to pay into a pension. So, if you’re in your 30s, you should ideally be saving 15% of your salary, if you’re in your 50s, you should ideally be saving 25% of your salary.
Please note, you will have to pay tax on any pension contributions you make above the annual allowance limit that tax relief applies to, which is currently £60,000, or 100% of your annual earnings.
You will automatically receive a State Pension – make sure you’re on track to receive the full amount by checking here. This government tool shows you how many years of national insurance contributions (payments and/or credits) you’ve got banked, how many more years of contributions you need to make to reach the 35 years required, and if you have any gaps to make up – in some cases, you may be able to make voluntary contributions, subject to time limits and eligibility rules.
As we’ve already touched on, the State Pension is unlikely to solely meet your financial needs in retirement. The two other main pensions are Workplace pensions and Self-Invested Personal Pensions (SIPPs).
If you work for an employer, you can join their workplace pension scheme. Note that if you’re at least 22 years of age and earn over £10,000 per year, you should be automatically enrolled in their pension scheme. If not, your company must let you join if you want to, unless you have previously chosen to opt out in which case it’s up to their discretion.
A workplace pension is often a highly effective way to save for your future as these schemes generally have low running costs, they’re well governed, and most employers add financial contributions to your pension too – under the rules of auto-enrolment there is a minimum contribution rate of 8% of your qualifying earnings. Employers must contribute at least 3% of this, with the employee contributing the rest.
Some employers offer a ‘contribution matching’ scheme, which means that they will contribute more to your pension if you choose to contribute more.
Whether you are employed or not, you could also choose to invest in a SIPP. A SIPP is self-managed, which means you make your own decisions about investment strategies and fund choices, so it is better suited to the investment-savvy individual.
The amount of income you’ll need to receive from your pension in your retirement will depend on your individual circumstances, financial demands and lifestyle choices.
As a general guide, The Pensions Regulator predicts that you’ll need around two thirds of your annual salary to live comfortably. If you’ve paid your full national insurance contributions, your State Pension will provide you with an annual income of £11,500 at the time of writing.
Your private and workplace pensions will hopefully top up your retirement income to meet your needs. You may also have other investments too, like rent from a second property or stocks and shares that provide dividends.
When you’re estimating your retirement income, consider whether you’ll still be paying a mortgage or paying rent. Will you still be paying off debts? Will your children still be at an age where you’ll want to financially support them through university or help them get on the property ladder? Will you be content with a quiet life or want to travel the world?
A financial adviser like our team at PIL Southampton could help you to estimate the financial contribution you need to make into your pension to fund your retirement lifestyle, or you could use a free online calculator, like this one at MoneyHelper.
It’s usually a good idea to maximise employer-based pension schemes before you think about setting up a personal pension scheme, for the reasons we’ve outlined above.
However, if you’re self-employed or you’d like to invest in a personal pension (SIPP), there are many choices out there, which a financial adviser could help to guide you through.
Depending on which SIPP you choose, you could make the investment decisions yourself if you’re confident doing so, or you could look at pensions that have fund managers making selections. You could also opt for a ‘ready-made pension’ where you can pay a fee to have your SIPP more managed for you than a traditional SIPP.
We would advise you to carefully think about your attitude to risk before you make your investment choices, and to review the charges that will apply, as what seems like a minimal difference in charges will compound over the year to take thousands of pounds off the overall value of your pension.
Once you’ve set up your SIPP, it’s prudent to check in every year to make sure you’re still on track to meet your retirement goals.
Our friendly team of independent financial advisers has many years of experience in this area. They will take the time to get to know you, your financial and lifestyle circumstances, and help you to make the best pension planning decisions to suit your individual needs.
It’s especially important to focus on your pension when you get closer to retirement age. Around 5-10 years before you retire, we can review your arrangements and re-adjust your risk levels if it’s appropriate.
You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.
IMPORTANT: Pensions are long-term investments. Capital is not guaranteed and you may get back less than you put in. Charges may apply.