How much to save for your 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.

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!

 We’re familiar with the gender gap in pensions for adults but there is evidence that this actually starts much earlier on. According to data from HMRC, parents and grandparents are more likely to save into a boy’s pension than a girl’s.

A Freedom of Information request by Hargreaves Lansdown revealed that 13,000 girls aged 15 or under had money paid into a pension for them in 2016/17 compared with 20,000 boys. The disparity means the pension gap can actually start from birth onwards. 

This only exacerbates the situation as women are likely to have less in their pension due to the gender pay gap. Nest found men are twice as likely to be in the highest income bracket and women are three times as likely to be earning less than £10,000 per year, which is the auto enrolment threshold for a single job.

Women are also more likely to take career breaks or work part-time to bring up a family. Added to which, they are more likely to live longer and spend longer in retirement so, in reality, will need more in their pension pot than men.       

Research in 2017/18 by the union Prospect found that the pensions gender gap equated to 39.9 per cent or a £7,000 gap in retirement income between women and men.  

Hargreaves Lansdown has calculated that paying £100 per month into a child’s pension until the child reaches 18 can increase their savings by as much as £130,000 by retirement. Yet the cost is only £21,600 plus tax relief of £5,400. Forward planning pays off!

Someone without any earnings can pay up to £2,880 each year into a pension and receive 20 per cent tax relief (up to £720) so it’s possible for parents and grandparents to make a significant difference to a young person’s financial future by starting a plan early. An added advantage is that once the money is in a pension, it can grow without attracting capital gains tax.              

It’s unclear why the anomaly between paying into boys’ and girls’ pensions has existed in the past. Some feel it may be because gifting has traditionally come from the baby boomer’s generation where men were more likely to have had the greater share of pension in retirement. 

Whatever the reason historically, the current message is to use children’s pensions to give the younger generation a helping hand but to do it equally.