The earlier you start building a pension pot, the more time you have to make it grow
Putting away regular amounts is the best way to grow your pension but there are lots of other ways to give it an extra boost too.
The retirement age is 66 (rising to 68 in 2046), and this is when you can start receiving your state pension, although many people decide to work for longer. It may seem like a long way off, but thanks to auto-enrolment, you probably have at least one pension already as every time you start a new job, you’ll automatically be signed up to a new pension scheme.
You can also open your own private pension, use savings and investments to supplement your retirement income, and there’s always the state pension to think about to fund your retirement.
Here’s everything you need to know.
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How much do I need in my pension when I retire?
The amount of money you need when you retire will depend on lots of things, mainly what you want to do when you stop working and what you’ll need to regularly pay for.
The official retirement living standards, created by the Pensions UK, predict that for a minimum standard of living, someone needs £13,900 to live on annually (or 22,500 as a couple). This rises to £32,700 for a moderate standard (£45,400 for a couple), and for what it says is a comfortable standard for a single person is £45,400 and a couple would need £62,700. But these are just guidelines and the exact amount you need will be unique to you.
To get an idea of your retirement budget, have a think about the following:
- Housing costs – your mortgage or rent, and potentially care home fees
- Household bills – energy, water, council tax, broadband, insurance and TV
- Food and groceries
- Health costs
- Travel costs – visiting friends and family, and the expense of keeping a car
- Leisure – eating out, cinema, theatre, shopping, days out
There are lots of helpful free tools online to calculate your retirement income, including from MoneyHelper.
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What is the average pension pot in the UK?
The average pension pot in the UK is £21,875, according to Pension Bee, although this varies depending on where you live.
However, this amount only meets the minimum standard of retirement from Pensions UK and 15 million people are currently under saving for retirement, according to the Pensions Commission.
In its latest report, it says this figure could rise to 19 million people who don’t have enough saved for when they stop working. It also revealed that low and middle income earners are most at risk, with around half only saving the minimum amount required by auto enrolment, and 45% of working adults not saving into a pension at all.
Does the value of a pension pot increase over time?
The value of a pension pot increases over time, so that’s why the earlier you start the more chance you have of it growing in wealth. It grows in three ways:
- Investment returns: as money within a pension is invested in things like stocks, shares and bonds, when these grow in value it then increases the value of the pension pot. While there are no guarantees with investing, the historical trends do show the average return on a pension pot at between 5% and 7%, according to Pension Bee.
- Compound growth: pensions also benefit from compound growth. This is the growth you make on a pension investment which is then put back into the pension pot, increasing its overall growth.
- Topping up your pension: you can also give your pension an extra boost by making additional contributions when you can to the pot.
Pensions can also increase thanks to the government’s triple lock scheme. This is a government guarantee that says the state pension will rise every year by the highest of the following measures:
- Average earnings growth
- Price inflation (measured by the Consumer Prices Index)
- A flat rate of 2.5%.
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How to boost your pension pot
There are lots of ways to boost your pension pot, which can make a big difference to the amount you have when you stop working. They include the following:
Use different types of pension
There are a few different types of pension you can use in retirement.
- The State Pension: this is available to most people, and the full amount of £241.30 per week is for anyone who has made 35 years of National Insurance (NI) contributions. If you’ve not made the full 35 years, you can make additional top ups. You can find out how much you are set to receive on the Gov.uk website.
- Workplace pension: you will be automatically entered into a workplace pension when you start a new job (you need to opt out if you don’t want to). The minimum amount your employer needs to contribute is 3% of your salary, and you will need to contribute 5%. Some employers will pay more money in though, and they may match the amount you contribute.
- Personal pension: you can also set up a personal private pension, known as a Self-Invested Private Pension (SIPP) this is especially beneficial for self-employed workers who don’t benefit from auto enrolment.
Top up your existing pension
You can add extra money to a private pension at any time. If you’ve received a pay rise, for example, or an unexpected windfall, this could be a good opportunity to add some extra money to your pension pot.
How much can I pay into my pension?
Pensions are a great way to save as they benefit from tax relief. That means when you put money into a pension, the government will top it up by 20%. So if you put in £80, the government adds £20 and you’ll have £100 going into your pension pot.
However there are limits on how much you can put in each year while benefitting from tax relief. If you put in money over this annual allowance, you won’t get tax relief on the extra amount. The current allowance is £60,000.
Track down old pensions and consolidate them
It’s predicted that there’s around £31.1bn in lost pension pots. These are pensions where the provider has lost track of the pension holder, often because they’ve not kept their details up to date when they’ve moved house or jobs. However, there are lots of ways to find old pensions for free, such as with the My Lost Account service from the government.
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Why it’s important to build your pension
Pensions are an important financial product but they’re often forgotten or overlooked for other pressing money concerns, such as mortgage costs and everyday bills.
However, while it’s better to start earlier, you can set up a pension at any point and even putting small amounts away can make a really big difference to the amount you retire with.
Because the money is invested over such as long time, it has a really good chance of growing (although nothing is guaranteed) and with perks like pension relief and employer contributions, you’re basically getting money for free to spend when you stop working.
The figures from the pensions industry which predict how much money you might need in retirement can be scary and overwhelming, but it’s important to remember they are just guidelines, and the amount you need will depend on your own lifestyle.
You may also have more money than you think, so the first step is to calculate exactly how much you might retire with, so you can make a plan on how to increase this (if you need to) and how many years you have to do this.
