Wondering how much you can save for your retirement? (Image: Getty)
Pensions in the UK act as a savings pot to which both you and your employer can add money.
From the age of 55 you can access this money for a steady income.
Since 2017, all workplaces must automatically include employees in pension systems.
Employers also have to pay into your pension fund – the minimum requirement is 3% of your wages.
But how much should you invest in a pension and what tax breaks are there?
Saving for a pension doesn’t have to be complicated. (Image: Getty)
How much should I put into my pension?
“It really depends on the individual circumstances and expenses.” personal financial expert Salman Haqqi told Metro.co.uk.
A common rule of thumb is that you should take your age and cut it in half to calculate how much you should contribute. So if you are 32 you will save 16% of your income. Remember that this number also includes your employer contribution.
“However, for many people this is not feasible, especially if you are raising a family, paying university fees, or planning to pay for child weddings.
“It makes more sense to work out how much you can realistically afford to contribute each month.”
Calculate what you can afford each month. (Image: Getty)
According to HMRC, the average saving on an individual level has decreased in recent years, although more people are now part of a system.
The minimum total that can be added is 8% of your wages. If your employer adds at least 3%, you need to add at least 5%.
Current median retirement income is relatively close to the UK median wage of £ 30,420. When social security and taxes are deducted, they add up to £ 23,111 – but what matters is that this does not take housing costs into account.
With the current retired generation tending to own their home entirely, the net income is very similar to that of a working person in the UK (who is likely to pay on a mortgage or rent a property).
The amount that you should save really depends on your lifestyle. However, research has shown that a couple would need a combined income of around £ 47,000 per year to live comfortably. A single person would need a little less at £ 33,000 a year.
What tax breaks are there for pensions?
If you put the money into your retirement yourself, you will automatically get 20% tax back from the government – which will be added to your savings pot. It is worth checking with your pension insurer whether you need to claim this yourself.
This is also the case with job-related pensions, but the tax saving may not need to be reclaimed as employers typically deduct less tax from your wage package.
If you are a taxpayer with a higher tax rate, you can claim an additional 20% back. The maximum taxpayer rate can claim a further 25%.
It’s worth noting, however, that a 20% tax break doesn’t mean a 20% refund of your premium – it’s calculated from your pre-tax earnings.
So if you are a simple taxpayer and invest £ 80 in your pension, you would have made £ 100 before tax. So that’s the number that is used to calculate the 20% – the tax relief at £ 20.
What’s the best way to save for a pension?
Experts recommend that you treat your pension like a savings account – overpay whenever you can.
If you’re offered a raise, or if you can afford to add more, it is best to contribute more to your retirement than to increase your regular expenses.
If you are self-employed, it is important to remember to save for a pension when you have the money to do it. 5 million people are their own boss in the UK and the savings for this group are lower than ever, according to moneysavingexpert.com.
There are independent pensions for people who are not part of a workplace system. You can get independent advice from financial groups like Unbias.
Tax breaks are possible depending on your pension plan. (Image: Getty)
What should I look for when saving for a pension?
Salman Haqqi, who works for money.co.uk, thinks it is important to remember that you are in control of the exact amount you deposit.
“With most pension funds, you have to pay between a minimum and a maximum percentage of your income each month. However, if you find that the amount you contribute each month is too much, you should be able to reduce it to just 1%. ‘
And while there is no limit to the amount you can invest in your pension, there is a limit to the amount that is tax-free. These restrictions include:
- All savings that make up more than 100% of your annual income.
- Savings in excess of personal allowance which is £ 40,000 for 2020/21.
- Savings in excess of £ 1,073,100 lifetime allowance.
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