How much should I pay into my pension?

There are several rules of thumb for how much you should pay into your pension.

These include building up a pension pot that’s ten times your average salary; contributing 10-15% of your income each month; and, if you’re just starting out, dividing your age by two and contributing that number as a percentage of your salary (i.e. a 40-year-old would contribute 20%).

While rules of thumb can be useful to an extent, the actual amount you should pay into your pension will depend on factors that are completely personal to you, such as how much you’ve saved so far and what type of lifestyle you want in retirement.

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To help you get started, here are some questions to consider.

How much can you afford to save?

It’s really important not to save more than you can afford. You can’t access money in a defined contribution (DC) pension until age 57 (or 58 from April 2028), so you must be comfortable locking away your savings for the long term. A good place to start would be to draw up a list of your regular expenditure – both essential and discretionary – and then work out how much money is left over each month.

Saving your excess income into a pension could make a big difference to how much money you have in retirement. However, you should also check whether you’ve built up a big enough ‘rainy day’ fund. Holding at least six months’ worth of essential expenditure in an easy-access savings account could help pay the bills if you suffer a period of unemployment, or cover unexpected emergencies like your boiler or car breaking down. 

Do you receive employer contributions?

Pension contributions from your employer can make a big difference to your overall savings. If it isn’t clear from your payslip, ask your employer exactly how much they’re contributing. This will help you make a more fully informed decision about how much to pay in yourself.

Under auto-enrolment, employers must contribute a minimum of 3% of your ‘qualifying earnings’ each year (£6,240 to £50,270 in the 2023/24 tax year), while you must contribute a minimum of 5%, including tax relief. Some employers apply the pension contribution to the whole of your earnings, not just to qualifying earnings. Others might offer higher contributions as you get older, or once you’ve worked for the firm for a certain amount of time.

What’s your pension annual allowance?

Bear in mind that there’s a maximum amount you can contribute to pensions each year and still benefit from tax relief. The standard pension annual allowance is £60,000 or 100% of your UK relevant earnings, whichever is lower. If you receive employer pension contributions, these will also count towards your annual allowance.

Your annual allowance might be lower than this if you earn a high income or have already flexibly accessed your DC pensions. For example, if you have an ‘adjusted income’ of £260,000 or more and your ‘threshold income’ exceeds £200,000, your annual allowance will be tapered by £1 for every £2 of adjusted income that exceeds £260,000, down to a minimum floor of £10,000. 

How much have you saved so far?

The current value of your pensions will be an important factor in determining how much more you need and want to save. How long you have left until retirement will be another influencing factor. If you have, say, ten years to go until retirement and your pension is on the small side, you may wish to think seriously about upping your pension contributions.

If you’ve had several jobs throughout your career, you could have accumulated multiple pension pots. A financial adviser can help you work out the total value of all your pensions, so that you have a more accurate view of your existing savings. They can then help you work out how much more you need to save to increase your chances of a comfortable and fulfilling retirement.

When was the last time you increased your pension contributions?

It’s easy to pick a round number to pay into your pension each month and then forget about it. But if you’ve received a pay rise and haven’t subsequently increased your pension contributions, this could be a wasted opportunity. When you earn more money, it’s easy for the extra cash to go towards additional discretionary spending. But paying the extra income into your pension could have a much bigger impact on your overall happiness and financial wellbeing.

It also avoids the risk of your extra income sitting in your bank account, where its real value could decline over time. Although interest rates have risen recently, they remain significantly below the rate of inflation. Investing your extra income in your pension will give it the chance to grow in real terms. What’s more, you’ll get tax relief on your personal pension contributions, which provides an immediate boost.

Next steps

Knowing how much you need to save into your pension each month isn’t straightforward, and that’s where getting some smart advice comes in. A financial adviser can explain how big your pension is likely to be at retirement based on your existing savings habits, and demonstrate the impact of increasing your pension contributions. They’ll also check that your pension is invested in a portfolio that suits your individual circumstances and is robust enough to deliver performance over the long term.

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The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.