How much should I pay into a pension?

One of the most common questions about retirement planning that we hear from readers is “how much should I pay into a pension?”

It can be tricky working out the optimum pension contribution that will ensure you have a comfortable retirement while also leaving you enough to enjoy your lifestyle today. Will your pension contribution enable you to meet your goals, such as retiring early, or going on exotic holidays once you finish work?

You also need to pay attention to any medium-term goals, for example, buying a home, putting kids through private school, or paying off your mortgage. How much can you realistically afford to squirrel away into a pension? Bear in mind that if you pay in too much now, your pension money is locked up until age 55 (rising to 57 in 2028).

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It’s certainly a balance weighing up how much you need in a pension. You also need to consider whether you already have a pension, such as a workplace pension, or other assets or income streams that you might use in retirement.

The state pension should provide a foundation for your retirement income - but you do need to save more, whether that’s in a workplace pension or personal pension like a self-invested personal pension (Sipp).

What is a sensible pension contribution?

Most of us are already paying into a pension pot thanks to the auto-enrolment initiative. This requires workers aged between 22 and state pension age to contribute at least 5% of their salary towards their pension, with their employer topping this up by 3%.

This, coupled with the state pension, gives you a strong start to saving for retirement – but it may not be enough on its own.

If you’re self-employed, you’re solely responsible for your retirement nest egg. There’s no employer contribution, so you’ll need to choose a pension provider and start paying in by yourself.

It’s worth taking a minute to think about how much money you might need in retirement.

According to the Pensions and Lifetime Savings Association, a trade body, retirees need an income of £43,100 per year for a "comfortable retirement", which includes some luxuries. For a “moderate retirement”, the annual figure falls to £31,300.

For couples, the joint income required is lower. Couples seeking a comfortable retirement need £59,000 a year jointly, or £43,100 for a moderate one.

The full state pension currently pays £230.25 a week, or £11,973 a year. So, there’s still quite some way to go in terms of paying into a workplace or personal pension to increase that annual income to give you a better quality of retired life.

Some experts recommend that you save up to 10 times your average working-life salary by the time you retire.

So, if your average salary is £35,000, you should aim for a pension pot of around £350,000.

Another tip is to save 12.5% of your monthly salary. If you’re already saving 8% via auto-enrolment, this would mean paying in an extra 4.5%.

You may find that if you increase your contribution your employer will match it. So if you contribute an extra 3%, your employer will pay in the same amount. This means you’ll have a total contribution of 14%, which is a decent amount to be saving for your retirement.

What is the average pension contribution?

On average, savers put £1,477 into their pensions in 5.7 individual contributions over the course of 2024, according to new data by PensionBee.

The data found that despite savers having to contend with prolonged high inflation and interest rates, and rising costs of living eating away at their incomes, pension contributions have increased since last year.

In 2023, the average saver put £1,192 away into their pensions, £285 less than the amount they did in 2024. This represents a 19% rise in pension contributions from 2023 to 2024.

However, figures such as these are nationwide averages and therefore should only be used as a guide rather than a target. Your own personal circumstances and income will determine how much you should put into your pension.

PensionBee’s analysis also shows that the stark gender pension gap became further entrenched in 2024.

Last year, the amount men put into their pensions increased by £316 (23%) while women only put in an extra £174 (18%) as compared with the year before.

The disparity now means the average man’s annual pension savings in a year comes to £1,662 while women trail behind at £1,155.

This more than £100 difference becomes especially worrying when you consider how pension contributions compound over a lifetime.

Lisa Picardo, chief business officer of PensionBee, said that while it is encouraging savers are investing more in their retirement even when costs of living are increasing, the gender contribution gap is “widening” and remains a “serious concern.”

“Women already face challenges such as lower average pay, career breaks, unpaid caregiving responsibilities and lower lifetime earnings, plus they tend to live longer, making it even more critical that they can save effectively for retirement,” she said.

“The pensions industry still has a long way to go in enabling this, by making its products, content and tools more accessible and transparent to all savers, regardless of gender.”

The “half your age” pension rule

Another tip sometimes suggested by financial advisers is the 50% pension rule. This is where you aim to contribute half your age when you start saving for retirement as a percentage of your salary when you first put money into a pension.

It benefits pension savers who start saving early in their career - but it can also be handy for those who have left it late, and want to know how much to contribute to try and catch up and still build a meaningful nest egg.

Say you started contributing to a pension at age 22, this means you would need to save 11% a year into your pension for the rest of your working life.

A 45-year-old would need to contribute 22.5% of their salary.

Start early!

Some of the best advice is not to think too much about the exact amount, but just to start paying into a pension pot.

That way you benefit from compound interest - this is the snowball effect where interest is earned upon interest. It enables you to turn small amounts of money saved into a pension early on into a decent sized pot by the time you retire.

Tax relief will boost your pension

It may feel overwhelming to try and contribute half your age, or increase the amount you save beyond the auto-enrolment minimum - or if you’re self-employed, divert some of your precious (and possibly precarious) income into a pension pot.

But don’t forget that the government will reward you for saving into a pension by adding tax relief on top.

Everyone can get tax relief when they pay into a pension, even children and people who aren’t working.

Basic-rate taxpayers benefit from a 20% top-up from the government. In other words, for every £100 that is paid into their pension, the government adds £25, bringing the total contribution to £125.

Higher-rate and additional-rate taxpayers are entitled to higher tax relief, of 40% and 45% respectively.

This pension contribution tax relief is effectively free money from the government, which can turbocharge your nest egg and help you reach your retirement goals.

How much can I put into my pension tax-free?

Each tax year, you can contribute up to £60,000 into a pension and benefit from tax relief.

This is known as the annual allowance. If you are a very high earner, and your annual taxable income exceeds £260,000, you will not be entitled to the full allowance. Instead, it will be reduced by £1 for every £2 of income that you earn over the threshold.

The maximum reduction is £50,000, meaning an annual pension allowance of £10,000 for the highest earners.

For example, if you earn £300,000 per year, then your income is £40,000 over the threshold. This means that £20,000 will be docked from your annual allowance, and your annual tax-free pension limit is £40,000.

Do I pay tax on my pension?

While pension contributions are tax-free for most of your working life, you will likely still need to pay tax when you retire and withdraw your pension.

This is because pension income still registers to HMRC as taxable income, meaning that if you withdraw more than your personal tax-free allowance (usually £12,570) in a year, you will have to pay some of it to the Treasury.

This is set to become far more commonplace thanks to this year’s increases to the state pension.

As the full new state pension has gone up to £11,973 a year, retirees getting this amount are now just under £600 away from maxing out their personal allowance just from the state pension alone.

This now means that receiving £597 from a private or workplace pension or from employment will push retirees past the personal allowance and force them to forfeit a portion of their income to the government.

In the 2024/25 tax year alone, around 350,000 more pensioners will be placed in this predicament according to former pensions minister Steve Webb.

He says this is thanks to “the repeated freezes in the personal allowance for income tax, coupled with a series of significant cash increases in the rate of the state pension”.

While you will have to pay income tax on your pension withdrawals, you will not have to pay National Insurance.

Summary

To help you work out how much you need in a pension there are plenty of online pension calculators.

For example, Moneyhelper’s pension calculator can give you a forecast of your likely pension income, including state pension, workplace pension and any final salary schemes. Unbiased also has a handy calculator.

We will leave you with three tips to help you work out how much you should pay into a pension:

• Think about how much money you’ll need in retirement (how many holidays do you plan to take? Will you have paid off your mortgage? And so on)
• Take into account all your retirement income streams. This includes your state pension, any final salary pensions and buy-to-let income
• Ask your employer if they will match extra pension contributions. If they do, this will boost your pension quicker than just relying on your own contributions.