Friday, December 03, 2021

How much should I put in a pension?

This morning I gave a  presentation on Housing Associations Pensions provision to my TUC Employment Law Course. 

One of the issues I discussed is "How much should I put in a pension"?

If you are in a "defined benefit" scheme (sadly - and wrongly, mostly only in the public sector nowadays) then the employee contribution is set but most workers are now in "defined contribution" scheme where they have to decide how much to pay into their pension. 

At my first ever TUC Pensions course (back in the day).  FBU firefighter and our TUC tutor, Terry Seagers,  gave a rule of thumb, that you need to put 20% of your income (including employer contributions if not self employed) into any pension scheme for 40 years to have a reasonable chance of pension equivalent to half pay at retirement and a lumps sum. 

There is a quasi scientific method much beloved by pension marketing pundits which says "tell us how much you want on retirement and when you want to retire".  They will then calculate what you need to put away in order to try and achieve this. This usually results in the demand for a contribution rate that will make you faint. 

Another "rule of thumb" which is as good as any other is below. But who knows. This is one of the many problems with DC and why we really need a different way to provide pensions :-

Take the age you start your pension and halve it. Then put this % of your pre-tax salary into your pension each year until you retire.

So someone starting aged 32 should contribute 16% of their salary for the rest of their working life. While 16% of your pay seem a huge commitment, this figure includes your employer's contribution – so you "only" need to fund the rest. ("only" my italics)

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