How Much Is Enough?
It depends on what kind of lifestyle you want to have at retirement how much money you’ll need. Have a look at our How Much Is Enough page to understand more.
How much can I pay into my pension each year?
Each year you can make total pension savings (including personal savings, tax relief, and contribution from your employer) of up to £40,000 per year without incurring any tax charge. This is known as your annual allowance (AA).
Despite this, you can only receive tax relief on your personal savings up to your earnings for the year. For example, if you had a salary of £25,000, you could only contribute personally £20,000, which would become £25,000 with tax relief. Your employer is not bound by this restriction.
Should you wish to make larger contributions than this, you may be able to carry forward any unused allowance from the past 3 tax years to enable you to make a much larger pension contribution with no taxation implications.
There are a couple of exceptions to the £40,000 annual allowance:
- If you earn a threshold income above £200,000 you may be subject to the Tapered Annual Allowance (TAA) which may restrict your annual savings to potentially as low as £4,000.
- If you have taken any money (even £1) from the Taxable Income portion of your pension you will be subject to the Money Purchase Annual Allowance (MPAA) which will restrict your annual savings to £4,000.
What If I don’t have a big enough pension to live comfortably?
It is best to stay aware of your pension pot and savings so that you can make changes to your saving habits during your working life to ensure a comfortable retirement.
If you do not expect to have a post-employment income which is half to two-thirds of your employment income, then you’ll likely feel a squeeze upon retirement. You’ll need to defer taking your pension, prepare to budget in retirement, investigate potential welfare payments alongside your pension, or save more now.
If you do not have a work-based pension or savings beyond the State Pension, then take a moment to look into how much you can expect to receive. And remember that you need a minimum of 10 years of paying NI contributions to qualify for some state pension, and 35 years of NI contributions for the full allowance. In some cases, you can earn towards your State Pension while raising children or claiming certain benefits.
It’s never too late to start saving, either into an ISA or into a Defined Contribution workplace Pension. Even a small contribution of £50 or £100 each month could make a big impact on your retirement savings in the long run.
Speak with your pension provider about increasing your contributions, how your pension has grown over the years, and how your pension is invested. Read more about how pensions work, how investments work and whether you should be taking on more risk. If you are coming up to your retiring age and realise that you do not have sufficient savings, then you could defer your retirement.
Deferring your State Pension will increase it by 1% for every nine weeks you defer. This works out at just under 5.8% for every full year. When you do begin drawing from your State Pension, the extra amount will be paid at the same time to you.
It is also possible to defer your Defined Contribution work-place pension. While you typically have freedom over what to do with your pension pot upon reaching 55, you may be able to continue building your pension pot up instead of withdrawing any.
Is there a lifetime maximum on pension savings?
The current maximum you can accumulate in pension across your lifetime without any taxation implications is £1,073,100. This is known as your Lifetime Allowance (LTA) and will generally increase each year with Inflation.
Can I retire early?
There are pros and cons to retiring early.
You’ll likely receive a smaller pension compared with someone who worked until normal retirement age – unless your employer is offering a substantially enhanced package. This could look like a lump-sum payment from your employer into your defined contribution pension or pension benefits that are worked out as if you had worked to normal retirement age as part of a defined pension scheme.
You won’t be able to access your State Pension until you reach your state retirement age, which will be in your mid-60s.
You’ll want to figure out your potential pension income before making a big decision about early retirement. You can ask your employer for an illustration of the pension you’ll get if you retire early. You may choose to use your pension to buy an annuity, for example. Read our article Accessing Your Pension.
Consider a Phased Retirement instead of fully stopping employment. Your workplace scheme might allow you to draw just part of your pension for now and increasing the amount later on as you decrease hours. If your workplace doesn’t offer this, you might want to consider transferring to a personal pension that you choose. However, be wary of transferring your pension if this means giving up on valuable pension guarantees.
Another option may be to take your employer’s early retirement deal and then pick up a part time job elsewhere.
What happens if I die?
Any money remaining in your Defined Contribution pension can be passed to a chosen beneficiary and will fall outside an estate for Inheritance tax purposes. If you die before age 75, your fund generally passes free of tax to whoever you’ve chosen. If you die after 75 the funds will be taxable when your beneficiary accesses the funds. They will be taxed at their marginal rate in the same way as if you were accessing the funds.
The money in your Defined Benefit pension will depend on whether you had retired or not. If you hadn’t retired, the scheme will pay out a lump sum that is typically 2-4 times your salary. If you are under 75 at this time, the lump sum is tax-free. However, if you had retired when a reduced pension will continue to be paid to your spouse or other dependent until their death.
It would be prudent to nominate your beneficiary through your pension provider.
Your State Pension cannot be transferred however your spouse or another beneficiary might be able to claim extra pension payments if you have made a qualifying number of National Insurance contributions. You or your spouse will need to contact the Pension Service on 0800 731 0469 (free phone) to find out if you or your spouse are able to claim.
If you or your spouse haven’t reached State Pension age yet, you might also be eligible for claim Bereavement Benefits.
But be sure to check your Annual Allowance for your pension. If the total value of all the deceased’s pension savings is more than the lifetime allowance, you might have to pay more tax on any pension savings you inherit. The allowance limit is currently £1,073,100 for the 2022-23 tax year.