Most workers pay 8 per cent of their earnings into a pension automatically under auto-enrolment
Pension companies are pushing for workers, who currently pay 8 per cent of their qualifying earnings into a retirement savings pot under auto-enrolment rules, to save more.
Doing so could boost your pension by hundreds of thousands of pounds, experts say.
The likes of Scottish Widows and Fidelity suggest workers should try and put 12 to 15 per cent away for their later years, once employer contributions and tax relief are factored in. Aviva suggests saving 12.5 per cent.
It comes after a major report from Scottish Widows suggests more than 15 million Britons – a fifth of the population – face retirement poverty.
Despite pension savings edging up slightly, rising prices have cancelled out progress, according to the report, with inflation, currently at 2.6 per cent, leaving many saving more but ending up worse off.
So, how much more could you save by upping your pension contributions? Below, experts from Scottish Widows have done the maths.
How does pension saving work?
Though self-employed people are responsible for saving into their own pensions, most workers are automatically enrolled into a pension scheme by their employer.
Those aged between 22 and state pension age, earning more than £10,000, are eligible.
Under auto-enrolment rules, you must have 5 per cent of your qualifying earnings – the bit of your salary between £6,240 and £50,270 – into a pension scheme, with your employer topping this up by a minimum of 3 per cent.
But you have the option to pay more, and some experts suggest you should do so.
If you do, some employers will then match your contributions, so it’s worth checking if they do so.
How much more you save if you pay 15% into a pension?
Scottish Widows have calculated that for someone starting their career at 22 on £30,000 – slightly less than the current UK average salary – and working until they were 68, would likely save £213,731 into their pension pot in today’s money, if they paid the minimum 8 per cent into their pension throughout their career.
The actual figure would be higher, but it would have the same purchasing power as £213,731 does today, because of over four decades of inflation.
If someone put away 12 per cent throughout their career, they would save £320,597, and someone putting away 15 per cent would save £400,746, both figures being in today’s money.
The full calculations can be seen below.
However, how much you need in retirement depends on what sort of lifestyle you have.
A set of standards from the Pension and Lifetime Savings Association suggest you need the following amounts to enjoy a minimum, moderate and comfortable retirement.
As the figures show, two people in a couple paying in the minimum 8 per cent in the above scenario would receive £41,044 – missing a moderate retirement – while a couple each paying in 15 per cent would receive £56,006 – just shy of a “comfortable” retirement.
Exactly how much you would make from upping your pension contributions, of course, depends largely on your earnings, so it could be less or more than the above figures.
Paying more into your pension could even cut your tax bill
As well as saving more for your retirement, paying into a pension can come with other advantages too.
UK taxpayers are entitled to tax relief on their own pension payments based on the rate of income tax they pay, with most getting a 20 per cent top-up from the government.
This means it only costs £80 to pay £100 into your pension.
Higher-rate taxpayers can reclaim an extra 20 per cent tax on pension contributions for a total of 40 per cent tax relief, while additional rate taxpayers are entitled to an extra 25 per cent.
This means that paying more into your pension can be a win-win.
