How much pension will you get?
Last updated 10 February 2016
Your State Pension is a secure foundation but not enough on its own for a comfortable retirement. Private pensions can boost your income.
There are many ways you can save for retirement, but pension schemes are specially designed for the job. The emphasis used to be on providing an income in retirement but, nowadays, with many schemes, you have the flexibility to draw out pension savings from age 55 onwards as cash lump sums, income or both.
The State Pension provides a fairly low income once you reach State Pension age (currently 65 for men and in the process of increasing from 60 to 65 for women) and subsequently increasing for both to at least age 68.
From April 2016, there will be a new flat-rate State Pension system and the maximum amount will be £155.65 a week. This pension is guaranteed for life and usually increases each year at least in line with inflation.
Private pension plans are schemes you can join through work or arrange for yourself. Some workplace schemes (called defined benefit schemes) promise you a set level of pension, usually worked out as a percentage of your salary. For example, you might get one-fiftieth of your average salary while in the scheme for each year you have been a member. So, if your average earnings are £30,000 and you have been in the scheme 10 years, your pension would be 1/50 x £30,000 x 10 = £6,000 a year.
Defined benefit schemes usually have a ‘normal pension age’ – say age 65. You can draw your pension earlier – as early as age 55 – but the pension you get will then normally be much lower.
Many other workplace pension schemes and all pensions you arrange for yourself are defined contribution schemes. You cannot know in advance how much pension you will get because this depends on:
- the amount paid in by you and anyone else (such as your employer)
- tax relief added to your scheme (see below)
- how well your invested pension pot grows
- charges deducted
- the choices you make about how to use your pot and investment conditions at that time.
You can draw out your savings at any age from 55 onwards as cash, income or both. Taking out cash lump sums will reduce the amount left to provide a pension. The earlier you start to draw a pension, the smaller it will be because you’ve had less time to build up your savings and the pension will have to last longer.
You can get an idea of how much pension you might get by using the Money Advice Service pension calculator.
Incentives to save
Your main options for boosting the amount of pension you’ll get are to start saving early, retire later and save more.
Workplace pension schemes and pensions you arrange for yourself have tax incentives to encourage you to save.
You get tax relief on contributions up to the greater of £3,600 a year or the value of your UK earnings. There’s also an overall cap of £40,000 a year (but less in some cases). For example: if you earn £3,000 a year, you can get tax relief on saving up to £3,600 a year; if you earn £35,000 a year, you can get tax relief on up to £35,000; or if you earn £70,000, tax relief on saving up to £40,000 a year. Anything your employer contributes on your behalf is extra to this.
If you have already started taking money from your pension pot, your annual allowance (that's the amount you can contribute to your pension and get tax relief on) usually falls to £10,000.
Your invested savings build up largely tax free. Provided you have reached at least age 55, you can take up to a quarter of your savings as tax-free cash. The rest is taxable whether drawn out as lump sums or income.
You can find out how much State Pension you have built up so far by ordering a State Pension statement from Gov.uk or by phoning 0345 3000 168.
Check your annual statements for any workplace or personal pensions to find out how these pensions are building up.
To learn about your options from age 55, contact the free and impartial government service, Pension Wise. For help deciding how to save or your options at retirement, contact a professional financial adviser.