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Funding Your Pension
Secure Your Retirement Future
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How Much Will You Need for Retirement?
One of the most important questions when planning for retirement is:
- When do I want to retire?
- How much income will I need to maintain my lifestyle?
These two questions are closely linked. The later you retire, the less funding you need, as your savings will not have to last as long. However, retiring earlier may require higher contributions to ensure financial security throughout your retirement.
Planning for Retirement – Understanding Pension Contributions
There are two main ways to fund your pension:
- Regular contributions (personal and employer contributions)
- Lump sum contributions
Both come with significant tax benefits that can boost your retirement savings over time.
Personal & Employer Pension Contributions
Employer Pension Contributions – Free Money for Your Retirement
If you are employed, you are likely enrolled in a workplace pension scheme due to automatic enrolment. Your employer contributes a percentage of your salary into your pension, alongside your own contributions.
For example, Sarah earns £40,000 per year. Her employer contributes 5% of her salary (£2,000 per year), while she contributes 5%. This means £4,000 per year is going into her pension – essentially, she is getting an extra £2,000 per year for free towards her retirement.
The more you contribute, the more your employer may also add, depending on your scheme rules. Always check if your employer offers enhanced matching contributions and take advantage of it.
Personal Pension Contributions – The Power of Tax Relief
When you contribute to a pension, you receive tax relief at your highest rate:
- Basic rate taxpayers (20%) – Every £80 you contribute becomes £100 in your pension
- Higher rate taxpayers (40%) – Every £60 becomes £100
- Additional rate taxpayers (45%) – Every £55 becomes £100
For example, Tom is a higher-rate taxpayer and contributes £500 per month to his pension. Thanks to tax relief, the actual cost to him is only £300 per month, but his pension receives the full £500 contribution.
If Tom continued this for 20 years, assuming 5% annual growth, his pension pot could reach £198,000 – despite him only paying £72,000 out of pocket.
Lump Sum Contributions – Boost Your Pension Faster
If you have a bonus, inheritance, or savings, making a lump sum contribution to your pension can have a significant impact due to:
- Tax relief, meaning the government boosts your contribution
- Compound growth, allowing your money to grow tax-free over time
For example, Emily receives a £20,000 bonus from work. She decides to invest the full amount into her pension.
- As a higher-rate taxpayer, she gets 40% tax relief, meaning the actual cost to her is only £12,000.
- If Emily leaves this investment to grow for 15 years at 5% annual return, it could grow to £41,600 – more than three times her net contribution.
This shows how investing early and taking advantage of tax relief can significantly grow your retirement savings.
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Secure your retirement in any situation
If you are unsure whether you are on track to meet your retirement goals, we can help. At Mather & Murray Financial, we offer independent pension advice to help you.
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