How much should I pay into a pension?

Piggy bank next to coins and sign saying Pension Plan

(Image credit: Getty Images)

published 30 December 2024

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?

But 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 £221.20 a week, or £11,502 a year. So, there’s still 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.

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.

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.

Ruth is an award-winning financial journalist with more than 15 years' experience of working on national newspapers, websites and specialist magazines.

She is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times.

A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service.

Outside of work, she is a mum to two young children, while also serving as a magistrate and an NHS volunteer.