How Much Should I Pay into My Pension?

So, exactly how much should you pay into your pension? If you’re pension planning for the future, you’ve likely considered this and have found differing advice. Well, there’s a simple answer, though it will depend on your personal circumstances.

For your pension, you’ll first need to approximate the monthly payout that you’d be happy with when retirement comes. Also, you should set a date for when you plan to retire. 

With these figures in mind, you can then calculate the total amount you’d need to save in the period left until you retire – this will essentially answer how much you, personally, should pay into your pension each month. Added to this, your contribution rate should be manageable on your current income without causing undue financial strain.

This guide breaks down exactly how to figure out what you want from your pension and what you can afford to contribute. At Finance Rate, we’re committed to providing straight-talking, independent advice about pensions, as well as other common financial products. 

How Much Should I Pay into My Pension? Here’s What to Consider

As of 2023, the state pension age is 66, but many people opt to retire later than this. This is often due to the state pension and their own private pension schemes not providing enough income for their desired or required living expenses. 

With some consideration of the precise requirements you have for your pension pot, you could start building a private pension that delivers what you need it to when you need it to.

Important to note: If you decide to withdraw a lump sum from your pension when you retire, that will reduce the overall amount in your pot. In turn, your pension pot will provide a lower amount of monthly income to you. Bear this in mind when planning your pension income targets.

7 Retirement Expenses to Take into Consideration

Your annual pension income should provide for all of your necessary expenditure. We’ve pulled together some of the key living costs to plan for. These will make up the majority of your spending. 

1. Rent or Mortgage Payments

If you’re not planning to pay off your mortgage by retirement, you’ll need to budget for mortgage payments or rent. You may want to consider downsizing to free up equity and reduce monthly costs as a retiree. 

2. Utilities & Household Maintenance

You’ll need to be able to cover monthly household utility bills, such as gas, electricity, broadband, water, and council tax. You’ll also need to factor in the ongoing upkeep of your property.

3. Food & Drink

Food shopping is an essential monthly expense. This can also include meals out at restaurants and cafes.

4. Transportation

Leave enough in your monthly budget to run a vehicle or pay for your public transport needs.

5. Leisure & Convenience

Retirement should be a time for enjoyment. You’ll likely want a leisure budget for activities such as hobbies, new clothes, and entertainment. This can also include monthly subscriptions like streaming services. Bear in mind that you’ll likely need more to spend on leisure due to your increased free time.

6. Holidays 

Are you planning to travel in your retirement? Or hoping to be able to afford regular holidays or trips? Make sure to include this in your costings for what you’ll need from your pension scheme.

7. Future Health & Care Costs

Ensure you’re comfortable in your retirement years by contemplating whether your financial plan allows for increased home care, assisted living, or possible medical fees. If you have any pre-existing medical conditions then you may wish to increase this aspect of your income budget.

Most people will need income to support some or all of these expenses when they retire. The question is, then, how much do you want to be able to spend on each?

How Much Monthly Income Will I Need When I Retire?

You may have been able to pay off your mortgage early and want to prioritise retiring early on a frugal pension. Equally, you may want your pension to deliver you an income that can support frequent trips abroad and meals at restaurants. In each case, the amount you should aim for will differ. 

You might now rightly be wondering, ‘how can I work out how much I should put into my pension when the retirement income I want might differ wildly from someone else?’ It’s a good question. It’s one that fiscal studies have attempted to answer through ongoing research.

Let’s take a look…

What Should My Annual Pension Income Target Be? 

As of 2023, Which’s annual survey of retirees and their monthly spending revealed three clear categories of income targets for retired people to aim for, based on real life spending habits. These are defined below by the types of products and services they were able to afford with their monthly budget:

  • Essential – This includes food & drink but no meals out, payments for rent or mortgage, utilities (including council tax), clothing, health products, insurance, transportation, household sundries, broadband & phone line costs. This category is essentially the bare necessities for living.
  • Comfortable – This includes the ‘Essential’ category as well as increased leisure spending, including on goods and services such as: alcohol, short haul holidays, tobacco, gifts, recreation, and charity donations.
  • Luxury – This is defined as the previous two categories as well as long-haul holidays, private health cover, DIY and home improvements, a new car every 5 years, and health club memberships.

The Three Types of Income Targets

Below is a table revealing exactly how much the surveyed participants in the study needed in order to live a life in each of the three categories.

 Single Person Household:
Annual Pension Income Target
Two Person Household:
Annual Pension Income Target
Essential Income Target£13,000 a year£19,000 a year
Comfortable Income Target£20,000 a year£28,000 a year
Luxury Income Target£32,000 a year£44,000 a year

Data source:

Remember to Consider Inflation

These income targets provide an estimate of what you would need in order to retire right now. It’s important to bear in mind that the estimates provided are just that: estimates. 

It’s impossible to know how much inflation will have impacted the ‘cost of living’ in the UK and abroad by the time you retire. An increased ‘cost of living’ could cause what you need to put away for your desired retirement to increase. 

If in doubt, always plan to put more into your pension than you need as a contingency.

If you’re still in need of another benchmark for what to aim for with your pension income target, Finance Rate has revealed the average UK pension pot as of 2023. That should be another source of guidance for how much to put into your pension.

How Much of Your Salary Should You Pay into Your Pension?

So, how much should I pay into my pension? 

You should now have a clearer picture of the income target you’d like to aim for by topping up your state pension with an employer pension or private pension. The question now becomes, how much of your salary should you put into your pension contributions to see if you can realistically make that happen.

How much you should pay into your pension scheme ultimately has to be a balance between what you want to aim to receive from your pension income and what you can afford to save during your career. 

Finance Rate has rounded up some strategies that could help you to meet your pension goals to the best of your financial ability. 

Use the Rule of Two Thirds

To work out how much of your salary you should put into your pension, there’s a common rule of thumb that can help. The rule of two thirds estimates that you will need approximately two thirds of your current income as income for your retirement. 

Reverse engineer this amount by using a pension calculator to see what monthly contribution would build a private pension that releases an income of two-thirds of your current salary, on a monthly basis. 

Use Your Age Divided by Two

Another strategy to determine how much of your salary to pay into your pension is to divide your salary in half to get the percentage you should contribute.

For example:

If you’re 20, divide by two to get a suggested 10% pension contribution.

If you’re 30, divide by two to get a suggested 15% pension contribution.

This can be a useful method for people who are younger and potentially at the start of their careers, so not at the peak of their career ladder earnings. 

Consider a Private Pension If You’re Self-Employed

If you’re self-employed, you will be paying National Insurance as part of your HMRC tax self-assessment. If you meet certain criteria, such as paying National Insurance for a set number of years, you will be entitled to a state pension when you retire.

As touched on before, this is unlikely to cover all of your income requirements. Are you self-employed and need to understand pensions better? Take the time to get knowledgeable so you don’t lose out come retirement.

Locate Any Past Workplace Pensions You’ve Lost Track Of

When answering the question ‘how much of your salary should you put into your pension?’, you might only be focusing on current and future salary. However, you should remember to locate any past workplace pensions you contributed to in previous jobs. Every little can help with your pension goals, especially over time.

As pensions are subject to tax relief, they are a tax-friendly way to generate income in your retirement.

Finance Rate’s pensions hub exists to ensure that you have all the facts you need to make smart choices about your pension, as well as loans, mortgages and other financial products.