How much should I have in my pension at 40?

Saving for retirement may not have seemed like a big priority until now. The cost of housing, childcare – and perhaps even school fees – can take up most of your monthly budget.

On top of that, holidays, cars, expensive hobbies, and an active social life add up. It’s not cheap being a Millennial, so your pension savings might not be as healthy as they should be. Are they going to give you the annual income that you need at retirement age?

If that all sounds familiar, the good news is: that it’s not too late to get back on track.  But you do need to start planning your retirement income now.

The first question to ask yourself is: “What kind of retirement do I want?”

Some people plan for adventure, luxury travel, fine dining and fast cars. If that’s the case, you may need to start to save a lot more.

But others are happy to downsize and reduce their spending. They enjoy spending more time with friends and family closer to home.

You should also think about when you want to retire. You won’t be able to claim your state pension until you’re 67. But this is under review, so it might be even later when you retire.

A State Pension alone will only give you a basic retirement income, so you’ll need to top it up with your personal pension or other savings and earnings to boost your annual income.

You can access a personal pension when you reach 55 – but you will need to have saved enough in your pension pot to last for the rest of your life. And based on current life expectancy projections, that could be 30 to 40 years – or even longer!

There are many ways to save for your retirement depending on your individual circumstances – but for most people, making pension contributions is a good option. Here’s why:

One of the best things about saving into a pension is that you’ll receive tax relief on everything you pay in, up to £60,000 per year, as long as you earn under £200,000.

This means, that if you are a 20% taxpayer and pay £100 per month into your pension, the government will top this up with another £20. But, if you’re a 40% taxpayer, you’ll receive a £40 top-up.

If you’re employed, your employer must enrol you into their workplace pension if you’re eligible.

You can opt-out, but because your employer contributes at least 3% of your salary (alongside your minimum pension contribution of 5%), you’d miss out on free money for your pension.

If you contribute more than the 5% minimum, many employers will match this, increasing their contribution as part of your employee benefits. You can also set up a personal pension alongside your workplace pension. But make sure you’re getting the full benefit of any pension contributions from your employer.

Compounding means earning interest on both your savings and the interest already earned. Over time, this effect builds up and grows your savings. The longer you leave your investment, the more it will grow.

That’s why starting young helps – you’ll need to save less than someone who starts later. But even at 40, don’t despair. You still have 20 to 30 years to benefit from the compound growth.

At 55, your pension becomes available to you. Before 2015, your only option was to buy an annuity, which gave you a regular monthly or annual income for life. The problem was that the annuity rates were often poor, and when you died, in more instances the pension would end.

These days, you can access your entire pension at 55 (increasing to 57 in 2028) and you can take a 25% lump sum from it entirely tax-free. But be careful – you must ensure you leave enough in your pension to support you and give you a retirement income for the rest of your life.

The answer depends on your retirement age and what kind of lifestyle you want. But a simple rule of thumb is to take the age you start saving and divide it by two. So, if you start saving to a pension at 40, you should aim to put away at least 20% of your income.

This might seem like a large chunk of your annual income – but as the government looks to save money where it can, it’s unlikely the state pension will give you enough to live on. So, we all need to take care of our own pensions and savings to provide us with a retirement income we can comfortably live on.

To figure out how much you should save and what you’ll need, it’s a good idea to seek help from a financial planner.

They can look at your individual circumstances, give you a projection based on your existing savings, and advise on the pension contributions you need to put aside each month to hit your goals.

Keep in mind that the value of pensions and any other investments, and any income you take from them, can do down as well as up, and you could get back less than you put in.

This is a question our financial planners get asked a lot. Combining pensions can make it easier to track your savings, and you may also save on management fees.

But sometimes it’s not a good idea, especially if you have a final salary or defined benefit pension from a previous employer. Plus you should also watch out for hefty exit fees.

Your retirement age plays a big role in deciding how much you need to save. The longer you delay retirement, the more time your pension contributions have to grow. But your ideal retirement age depends on your individual circumstances and financial goals.

For example, if you want to retire early, you’ll need to save more to ensure your retirement income lasts longer. On the other hand, retiring later, or taking a phased retirement, gives you more time to increase your savings.

It’s important to check your pension contributions regularly and adjust them if your situation changes, like if your annual income increases. This will help you stay on track toward the retirement lifestyle you want.

If you reached a stage in your life when the thought of retiring has begun to come into view, you will need to take stock of what you have now, and work out what more you need to do to plan for the retirement you want.

If you would like advice on how much you have and how much more you need to put aside, speak to one of our advisers. You can either use our handy tool to find a local financial adviser near you or call us on 0800 915 0000 to arrange an appointment or simply to find out more about how we can help maximise your retirement income.