Pension help please!

[Pensiondrama]

I am 35 year old , increased my pension contributions to 12% (they used to be 5%) my employer is capped at 10% , this will give me a total 22% .

Do you think that this is a good number , is it average? Is it too much? Is it too little?

Total new contributions from myself and employer will be around £500/month.

AIBU - You will be fine, contributions sound sensible

AINBU - You will put in your pot too little. If you can increase your contributions to £xxx/month .

A rule of thumb is is takes around £350k of capital to generate C£10k a year retirement income. You need to work out what sort of retirement you want and work back from there about what you need to contribute to achieve that

@HermioneWeasley When you say £10k year do you mean around £850/month? That’s nothing! 🫢
And in order to get £850/month you need to have a lot of £350k ?!

MSE advises taking your starting age for paying into a pension, halving and paying that % into your pension.

So on his advice, you are doing well vs what you earn.

Maybe look at some pension calculators as well and work out how much you want in retirement, when you want to stop work and how big your pension pot would be at that point.

Surely the age you start paying, and your salary, are massive contributing factors!
If you’re 50 and earn minimum wage, then 22% contributions will give you a tiny pension. Aged 25 earning £50k, then it will be much bigger.

You will also get the state pension although the age when that gets paid out keeps going up.

Absolutely - it depends on how much money you want in retirement which is why its important to use a pension calculator to compare what you are saving and what you expect the pension to give you.

When do you want to retire, OP? Do you expect to have career breaks for children in future? This will make a huge difference to how much you should pay in.

10% from your employer is good. I’ve never had more than 5% in the private sector.

£10k year do you mean around £850/month? That’s nothing!
Are you in the UK if so Don't forget you will also have your state pension which is currently about 10k a year if you have full NI contributions. Also if you have your own home presumably your mortgage will.have been paid by the time you retire so your outgoings are reduced .

Yes, C£350k of capital to buy C£10k a year of annuity. So if you want £20k income a year you need a pot of C£700k

as other have pointed out there is a state pension, hence my advice to work out what you lifestyle you want and work back from there.

You all scared me and I thought I was doing well with 22% contributions. I think I will die in poverty…

Sorry one more question please. This is all taxed right? So when you say £700k gives you £20k/year , this will be taxed , correct? Or is it take home money post tax?

You may want to consider index linking of your pension too, if you want it to rise in line with inflation.

This last couple of years of high inflation have demonstrated how valuable such pensions are, though they do cost more than those that aren't index linked.

Not OP but… I’m about to go on my first mat leave, do pension contributions not typically continue through that?! I guess that makes sense but whoops, another thing for me to think about 😬

I read that in order to get the same lifestyle as pre-retirement age you need to aim to 80% of your current salary as your take home salary.

So, if my current salary is £40k, then 80% of that is £32k, say £30k for simplicity.

This means that I need £20k from private pension (£700k pot) plus £10k government pension.

If I have now £50k in my pot, which I built in 1 decade, I need another 13 decades to make a £700k pot!!! 😳🥴

Are my maths wrong?

You're in the very early days of establishing your pension OP. Your pot is going to be pretty small still.

It's like compound interest; as the years go by that money will increase and increase so don't the disheartened, you're doing really well and 22% is an excellent amount to be putting away.

Tax - you pay tax like anyone else as a pensioner (which a lot of people seem to forget when pensioner-bashing), but you don't currently have to pay NI even if working past State Pension age and not at all on Pension income.

You can (at present) take up to 25% of your accumulated pension fund tax-free as a lump sum - some people choose to spread that out rather than take it all at once.

Employer contributions should continue during Mat leave - yours will depend on income and the terms of the pension.

There are also things like getting on the property ladder, where hopefully your investment will grow with inflation and you can downsize to release capital after retirement. No one really knows how a pension pot will grow over the next 30 years or more, it may give a better or worse income than expected currently. Savings well invested may give better returns. But then there are tax advantages putting funds into pensions.

And of course you don't pay tax on your contributions on their way in either , that's that's a further advantage.

@Fightyouforthatpie

Apologies for butting in, but I have a couple of questions:

Do you think that the 25% tax free allowance is likely to change soon?

And do you need to take it one lump or can you take, say, 6.25% per year for 4 years and not pay tax on those 4 lump sums?

Have a go on the Aviva retirement planner. That’s really good at taking your current pot and your current contribution rate and working out what that might mean for your retirement pot and income.

You can then play around with it to flex different retirement ages etc.

If your pension pot was say £100k, you could take £25k in one go tax free, anything after that would be subject to tax. Or you could take say £10k per year and not pay tax on the first £2.5k. Either way, the tax you pay depends on what other income sources you have such as the state pension - they are added together just like now to determine your tax.

Thanks - just trying to weigh up when we press the button on the pension. A bit concerned that the 25% tax free allowance gets changed so we might’ve better off just going into it now.

When I retired, my salary was around £42K. My pension is £12k and I have a part time job with a salary of around £14k. I have a much better lifestyle than I did at 55, and currently am managing to save £500 a month.

That is not correct. If you retired today as a 67 year old (current retirement age) with a £350,000 pension pot, you could take a tax free lump sum of £87,500 and you could purchase an annuity income with the remining fund currently paying £15,531. You of course don't have to purchase an annity and may use your funds to draw upon flexibly via drawdown. Of course we have no idea what annuity rates or investment returns will be in the the future.
You are doing well with your pension savings and don't forget you will have state pension too, which isn't an insignificant amount either. The bottom line is the more you save for retirement, the more options you have.....like everything in life its about a balance as we never know what the future holds. You don't want to put everything by for retirement and then don't make old bones, or alternatively you don't want to have saved so little that your finances are bleak in retirement.
Remember when you are not working you do not have pension contributions to make, NI contributions, transport costs etc....