Pensions

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How much will it cost?

If you have a company pension scheme and the benefits from this are expected to be enough for your retirement then the cost is simply whatever contributions that schemes requires you to make. However if you are not in a company scheme or the level of benefits is not as high as you believe you will need in retirement then you are likely to have to make some further provisions.

Pensions are simple in terms of how much they cost, the more you put in the more you get out. To know how much to put in you first need to know how much you want to get out (you could start from how much you can afford to find out what you might get out). A typical target might be to replace 50% of your gross earnings at retirement. This would provide a comfortable retirement for most people, although higher and lower amounts are equally as valid as it really depends on what you think you will need in retirement. Living costs are generally lower (concessions and larger tax free allowances) although you will of course have more leisure time. We recommend you spend some time planning your retirement with the help of an independent financial adviser who will be able to explore this issue further with you.

The figures below give you an idea of the level of contributions (as a percentage of your gross earnings, i.e. before income tax) that need to be made each year to replace half (i.e. 50%) of your gross income at retirement, assuming retirement at 50, 55, 60, 65 and 70 for people currently aged 20, 25, 35, 40 and 45. These contributions need to be made each year until retirement. The figures below assume no other sources of income in retirement such as state pensions or any pensions from employers.

The figures here have been based on assumed inflation of 2.5% per year, salary increases of 4.5% per year, investment returns before retirement of 7.0% per year and returns after retirement of 5.5% per year. The pensions are assumed to be linked to price inflation when in payment and have a 50% spouses pension (payable for life to your spouse) on death.

Therefore if you were trying to target a pension income at age 65 of 30% and were currently aged 40 then you would need to pay contributions of around 30% / 50% * 23% = 13.8% of your gross salary. This rate should stay constant, i.e. the amounts actually paid should increase each year as  your salary rises.

Remember you may have other pensions from the state or from an past or present employer. When considering the level of pension to target at retirement these also need to be taken into account.

As you can see it pays to start thinking about paying contributions earlier rather than later. If you want to retire at 65 and delay making pension contributions from age 25 to age 35 you are increasing the rate you need to pay (albeit for a shorter period of time!) from 12% to 18%. There is no such thing as being too young to start a pension, but unfortunately there is certainly 'too old' for many!

If you are planning your retirement then we suggest you seek professional Independent Financial Advice. This will enable you to find the best products on the market to suit your needs and will give you reassurance that you are doing the right thing with your pension savings. If in doubt get independent financial advice from a qualified financial adviser.