How much should I be saving towards my pension?

Research shows that we put ambitious targets on our retirement income and then underestimate how much we need to save to get there.

Before we delve into how much you should be saving, here’s a quick overview of the two main types of pension schemes:

In a defined benefit scheme your employer promises to deliver you an income in retirement. You’ll most likely have to contribute each month too, putting in a required amount.

These ‘gold-plated’ schemes are increasingly rare.

The other type of scheme is a defined contribution scheme. If you have this type of scheme, you will save into this and get contributions from your employer too. The money is invested to build a pot which will then fund your retirement.

If you have a defined benefit scheme, you just need to save as much as your employer says. But with a defined contribution scheme things are a little more complicated… The onus is on you to deliver the money you need in retirement – the more you save, the more you get.

How much will I need in retirement?

In retirement, your outgoings are likely to be lower. For instance, most people will be mortgage free and not supporting children. In the finance industry, there’s a vague rule that some currently aged 40 would need around 50% of their current income to have the same standard of life in retirement.

You should also factor in the state pension. Under the new flat-rate scheme this is worth £155.65 per week (£8,094 per year). So, someone targeting a retirement income of £23,000 would need to contribute £16,000 from their own pensions.

How much should I be saving?

Naturally, the amount you need to save depends on the size of the pension you want. However, it also depends on your age.

For instance, putting 12% of your salary towards your pension might be enough if you start in your 20s, but if you leave it until you’re 40, you might need to pay in closer to 20% to get the same level of income.

It’s sometimes said that the rule for working out what percentage of your salary needs to be going into a pension is half the age from when you started saving. So, if you started at age 30 it would be 15%.

This said, given the variation in salaries and personal circumstances, it can be a good idea to get a slightly more profound insight into your finances. 

You could use some sort of pension calculator. There are plenty of different calculators online that let you play around with the numbers. A quick search on Google will reveal plenty. 

All things considered, this can’t give you quite as clear a view on your financial retirement scenario as speaking to an independent financial adviser. They should have the knowledge and experience to help you get both a clear view of your current situation and the changes you could make so that your money works harder towards your goals.

The government has confirmed that the minimum age for drawing a personal pension is to rise to 57 in 2028.

Savers who pay into a personal pension either directly or through their workplace can currently access their money at 55. However, the government plans to raise the age as a result of increased life expectancy.

The change hasn’t yet been brought into law, but Treasury Minister John Glen has confirmed there are plans for legislation. 

In parliament, he said: “In 2014 the government announced it would increase the minimum pension age to 57 from 2028, reflecting trends in longevity and encouraging individuals to remain in work, while also helping to ensure pension savings provide for later life.”

The change will affect workers currently aged 47 and under, and was first announced by then chancellor George Osborne.

As chancellor, George Osborne significantly changed the way we can access our pensions.

He brought in rules that allowed retirees more access to their personal pensions, removing both the limit on cash withdrawals and the requirement to buy an annuity to ensure a secure retirement income.

Opponents to the rise in pensions age claim that the changes restrict workers’ freedom to retire. The changes will make it more difficult for some to retire sooner.

One investment analyst has described the change as a “kick in the teeth at a time when many people are reassessing their work/life balance after a terrible year socially, emotionally and economically.”

However, others believe that the changes are a positive step because they give people two years more to pay into their pension funds. They argue that this will increase the chances that retirees will have enough saved in their pension pots to provide an adequate level of income for the remainder of their lives.

Those who were planning to access their pensions at 55 but can no longer do so could look at other options. These could include saving into an Isa to fund the two year period before turning 57. 

Most savers will agree that the government is right to give so much advance warning, unlike with the increase in state pension age for women from 60 to 65, which caused some animosity. These changes do not affect when you can claim your state pension.

If you have any further questions around your pension pots, please get in touch.

Research shows that we put ambitious targets on our retirement income and then underestimate how much we need to save to get there.

Before we delve into how much you should be saving, here’s a quick overview of the two main types of pension schemes:

In a defined benefit scheme your employer promises to deliver you an income in retirement. You’ll most likely have to contribute each month too, putting in a required amount.

These ‘gold-plated’ schemes are increasingly rare.

The other type of scheme is a defined contribution scheme. If you have this type of scheme, you will save into this and get contributions from your employer too. The money is invested to build a pot which will then fund your retirement.

If you have a defined benefit scheme, you just need to save as much as your employer says. But with a defined contribution scheme things are a little more complicated… The onus is on you to deliver the money you need in retirement – the more you save, the more you get.

How much will I need in retirement?

In retirement, your outgoings are likely to be lower. For instance, most people will be mortgage free and not supporting children. In the finance industry, there’s a vague rule that some currently aged 40 would need around 50% of their current income to have the same standard of life in retirement.

You should also factor in the state pension. Under the new flat-rate scheme this is worth £155.65 per week (£8,094 per year). So, someone targeting a retirement income of £23,000 would need to contribute £16,000 from their own pensions.

How much should I be saving?

Naturally, the amount you need to save depends on the size of the pension you want. However, it also depends on your age.

For instance, putting 12% of your salary towards your pension might be enough if you start in your 20s, but if you leave it until you’re 40, you might need to pay in closer to 20% to get the same level of income.

It’s sometimes said that the rule for working out what percentage of your salary needs to be going into a pension is half the age from when you started saving. So, if you started at age 30 it would be 15%.

This said, given the variation in salaries and personal circumstances, it can be a good idea to get a slightly more profound insight into your finances. 

You could use some sort of pension calculator. There are plenty of different calculators online that let you play around with the numbers. A quick search on Google will reveal plenty. 

All things considered, this can’t give you quite as clear a view on your financial retirement scenario as speaking to an independent financial adviser. They should have the knowledge and experience to help you get both a clear view of your current situation and the changes you could make so that your money works harder towards your goals.

HMRC have refunded £627M in overpaid pension tax. Pension savers across the country could be due a rebate after new HMRC figures show that some have been wrongly taxed after drawing from their pension pots. Hundreds of thousands of people have been overcharged in tax since new pension rules were introduced back in 2015.

As you may already know, pension freedoms gave savers more control and allowed pensioners over 55 to withdraw money from their pots whenever they like. 

Under the rules, the first 25% of withdrawals are tax free, while the remaining 75% is added to taxable income for the year. 

Since changes were introduced, more than £37 billion has been taken out of pensions savings.

The Sun claims that the overpaid tax comes primarily from cases where savers were still working. HMRC wrongly applied emergency tax on the first 25% of withdrawals that it has incorrectly categorised as additional earnings.

Pension savers who make larger, inconsistent withdrawals are at a much higher risk of being emergency taxed. While pension freedoms allow over 55s to access their retirement savings more flexibly, they certainly increase your chances of falling foul of the taxman.

Of the £627 million, the taxman has paid back £27 million in overpaid tax during lockdown according to Which?. The average amount that each person received was £3,560. This was an £845 increase on payouts during the previous quarter. 

Think you might have overpaid? Here’s how you can claim

There are three ways you can claim back overpaid tax on the government’s refund website. 

If you haven’t withdrawn your entire pension and aren’t taking regular payments, you can claim using a P55 form.

If you have withdrawn your entire pension and receive other taxable income, you should fill out the P53Z. And if you have withdrawn your entire pension and have no other taxable income, you should fill out the P50Z. 

HMRC are yet to clarify what form savers who haven’t withdrawn their full pension but do take regular payments should fill out. Hopefully, they will do so in the near future. If you would like any more information about your pension savings, please get in touch.

There has been much talk in the financial press recently of proposed changes to the threshold for the tapered annual allowance from £110,000 to £150,000.

The taper was introduced in 2016 and gradually reduces the annual allowance for those on high incomes. For every £2 of adjusted income above £150,000 a year, £1 of annual allowance is lost. 

It has proved unpopular as individuals in that earnings bracket can have their annual tax-free pension savings allowance reduced from £40,000 to as little as £10,000. They are also at risk of  receiving a lifetime allowance tax charge on their benefits.

The situation gets confusing because it hinges on adjusted and threshold income. Adjusted income includes all pension contributions (including any employer contributions) while threshold income excludes them.

To make matters worse, HMRC start with ‘net income’ but do not just mean ‘income after tax’. In this context, they count all taxable income less various deductions, such as member contributions to an occupational pension scheme under the net pay arrangement. 

The sponsoring employer of the pension scheme will deduct employee contributions before deducting tax under PAYE. These can be higher for many NHS workers compared with the private sector, as they are saving into a ‘defined benefit’ scheme.

This is why the taper threshold has caused particular problems for the medical profession.   Many doctors have been forced to limit the work they do in an attempt to avoid significant charges on their pension. The system has reduced any incentive in accepting promotions and has encouraged many to consider early retirement.      

As a result of the pension crisis in the NHS, the Treasury has outlined plans to address the taper and increase the tax relief. The average earnings for a consultant are £112,000 so an estimated 90% would fall under the new limit of £150,000.   

However, representatives of the British Medical Association (BMA) state that the proposals do not go far enough and will in fact cause even more of a ‘tax cliff’. Just increasing the threshold  will do nothing, they feel, to reduce the complexity of the taper.           

Pension specialist, Helen Morrissey, calls for the taper to be scrapped altogether, describing the plan as a sticking plaster when major surgery is required.             

It’s a topic to watch carefully. HMRC face a substantial decrease in revenue if they do make changes to the annual tapered allowance but the government has pledged to try and solve the crisis.

If you have any queries about how an increase in the threshold would affect you, do get in touch.

Company directors and owners of SMEs make plans and do forecasts all the time. Cash flow forecasts, SWOT analyses, plans for renewals and refurbishment; there’s hardly a day when they’re not eyeball to eyeball with a spreadsheet.

So why do so many of them fail to plan their own retirements properly? In our experience company directors and owners of SMEs are so wrapped up running their business that they often forget their own financial planning – or simply don’t see it as a priority. There is clearly a need for more directors to plan properly: why do so many of them fail to do so?

Over the years we’ve probably been given half a dozen answers when we’ve asked that question. As you’ll see, none of them really hold water…

“I haven’t got time.” The simple fact is that no one ever has time. And yet planning your retirement is one of the most important jobs you’ll ever do. As the old saying goes, a director or owner of a small business will either walk out of his business or be carried out of it. Assuming your preferred course of action is the former, then there needs to be enough money waiting when you do eventually walk out – and the only way you can make sure of that is to plan for it.

“It’s too early/too late.” It’s not too early if you’re in your twenties or thirties and it isn’t too late if you’re in your fifties or sixties. We know that in your twenties and thirties you’re working all the hours in the day to build your business: but trust me, you will get older – rather more quickly than you think. And yes, of course it’s easier to achieve savings targets if you have more time but the simple fact is that there is need for financial planning at all ages, as personal circumstances and financial planning goals are always changing.

“I’m going to keep working.” There seems to be a trend amongst some business owners and directors at the moment to declare that they’ll never stop working, that nothing is as satisfying as working so why would you ever want to stop? Unfortunately your health, your family and your competitors may eventually play a part in this decision. In our experience, there comes a time for every entrepreneur and director when ‘enough is enough’ and when that time comes it needs to have been planned for.

“It’s boring/not worth it.” In some ways this is one of the easiest objections to understand. Many directors and entrepreneurs – especially younger ones – have seen their own parents dutifully save for retirement and then not be very well off when they do finish work. Unfortunately, everyone now working faces a very simple fact: the population is getting older and the Government simply won’t be able to fund the retirement you want.

“The numbers are too big/too frightening.” Sadly, this is a reflection of proper financial planning. If we’re going to plan for the retirement you really want then the numbers will be big – and they will be challenging. But there is no point in us preparing a financial plan which provides less than you want – and it’s surprising what can be achieved if you save consistently and keep your savings and investments under regular review.

“My business is my pension.” Despite the fact that virtually no businesses are sold at exactly the right time for exactly the right amount of money, many directors and business owners still say this. Of course the answer is to build your business but you also need to build cash outside your business as well. That’s what gives you choice and control and, ultimately, that’s what allows you to dictate the timing and the quality of your retirement.

We’re always happy to talk about a client’s retirement planning. Directors and business owners can plan for their retirement very tax efficiently – and they enjoy flexibility which certainly isn’t available to normal employees. It makes sense to explore the options: we promise you that it isn’t too late and we’ll do our best not to be boring!