A lot of people ask this question “How much should I contribute towards my pension?” and the simple and short answer is, as much as you can afford to pay. Because the more you pay towards your pension plan, the more pension income you could get when you retire.
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State Pension
To get the full state pension, £221.20 a week for tax year 24-25, you will need to a total of 35 years of NICs (National Insurance Contributions).
You can check your state pension forecast on the Government website and you can always top up your state pension if you do not have enough qualifying years to get a full state pension. You top up your state pension by paying voluntary NICs, Ts&Cs apply.
What are the benefits of savings into a pension plan?
The benefits of saving into a pension is that, unlike most other saving and investment products, your employer and the HMRC can contribute into it as well.
Your employer must offer you a workplace pension and they must contribute to it as well, providing you are making contributions.
The HMRC will contribute towards your pension plan in the shape of Tax Relief, which means for a basic rate taxpayer, for every £100 you pay towards your pension, HMRC will pay £25 to make the total contribution £125. If you are a higher rate taxpayer, you can claim a further 25% on your tax return, that is rising to 31% if you are an additional rate taxpayer.
If you have a pension plan that you have not used and if you were to die before the age of 75, that will mean that the pension plan can be passed on as a lump sum without being subject to Inheritance Tax.
When you invest into a pension plan, the money will usually be invested into a portfolio of investment funds and these investment funds are managed by professional investment fund managers, who will be able to diversify your investment and spread the investment risks.
What is the Annual Allowance for pension contributions?
The maximum contribution into pension plans including the tax relief is £40,000 or 100% of you gross annual earning, whichever is lower. So, if you earn £30,000 a year, then the maximum you can contribute towards your pension is £30,000.
If you do not earn or your earnings are less than £3,600, you can contribute up to £2,880, which will be £3,600 after the tax relief.
The Annual Allowance of £40,000 is the maximum contributions that you can make in a year towards ALL of your pension plans. If you exceed the Annual Allowance, you will be subject to annual allowance charge, which simply means that the access amount will be added to your taxable income for the year.
You can carry forward any annual allowance that you have not used in the last 3 years, this option is called “Pension Carry Forward”
How much pension will I need?
This is one of the most common questions about pension contributions and one of the most difficult too, as it has so many variables. How much pension you will need will depend on how long you will live, no one knows, what type of retirement you are aiming for, and your current income.
However, we will use the standard government answer for that, which is you need to half your age and this figure is how much you need to contribute of your income. For example, if you are 30 years old, then you need to contribute 15% of your salary into your pension plan.
As I mentioned, this is a standard answer, but how much you will contribute into your pension plan is a personal choice as we all have different financial circumstances and retirement needs. You will need to think what sort of retirement you are aiming for and how comfortable this retirement will look like and to achieve that you need to start early and pay as much as you can afford to achieve the retirement that you are aiming for.
If you are not sure if what you currently have is enough and your current pension arrangements would provide you with a good retirement, it is always advisable to seek a financial advice to review your current pension arrangements.
What is Tapered Annual Allowance?
The tapered annual allowance will apply to the individuals who earn more than £240,000 per year, as their income will affect their pension contributions annual allowance. The way the tapered annual allowance work is that for every £2 that the individual earns over £240,000, the allowance is reduced by £1. For example, if you earn £260,000 per annum, your annual allowance will be reduced to £30,000.
