This is how much you should pay into your pension per year - according to Martin Lewis

Friday, 19th February 2021, 12:11 pm
Updated Friday, 19th February 2021, 12:11 pm
Have you started saving for your pension yet? (Photo: Shutterstock)

Retirement may still feel like a long way off yet, but planning ahead will ensure you are financially better off when you reach state pension age.

For men and women the state pension age is currently 66, although this is scheduled to rise to 67 between 2026 and 2028.

State pension age is kept under constant review and is expected to rise again to age 68 between 2037 and 2039, with various factors such as life expectancy influencing the changes.

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Automatic savings

Many companies now offer employees auto-enrolment into a pension scheme, meaning most workers over the age of 22 are now automatically saving for their retirement with each pay cheque.

There are several pension plans that you can choose from, including state pension and private workplace pensions.

The state pension provides a minimum standard of living when you retire and is paid weekly by the government.

The amount is currently set at £175.20 per week, although this will undoubtedly rise over the years due to inflation and average earnings.

By contrast, private pensions are ones that you save for yourself, or via your employer - this is known as auto-enrolment.

These private workplace pensions automatically take effect when you are earning more than £10,000, and you are aged 22 or above. These pension contributions are also tax-free.

Money Expert Martin Lewis explained on the ITV Money Show: “This means that if you are an employee, you are almost automatically contributing into a pension.

“The total amount you must pay in is 8 per cent of your salary - 3 per cent of this must be from your employer.

"The average worker pays 20 per cent tax, so for every £100 you earn, you take home £80.

“However, with pension contributions, you get the full amount, meaning you actually get a small pay rise by putting cash away each month.

"This money is then invested in the stock market, a pension fund or an alternative investment over the course of your working life.

“The earlier you start, the more it can grow - but you can't touch it until you're 55."

How much should I be paying in?

Mr Lewis explained that you should aim to save around two thirds of your final salary each year for when you retire.

He said: “To do this, you need to take the age you start contributing, half it, add a percentage sign, and contribute that much each year for the rest of your life.

“For example, if you start contributing at the age of 30, you’ll need to pay in 15 per cent a year for the rest of your career.

“But of course, the earlier you start contributing to your pension, the less of your salary you’ll have to part with.

“Even just £20 or £30 a month will compound over the years to give you a much better savings pot come the age of 55.”

To find out how much state pension you could get, when you can claim it, and how to increase it, visit the government website and fill out an application online.

For further advice on pensions, you can also contact the government’s Pensions Advisory Service free of charge on 0800 011 3797, or via an enquiry form online.