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How Much Should You Invest in a Pension?

By: Garry Crystal - Updated: 13 Oct 2012 | comments*Discuss
Invest Pension Funds Retirement

How much should you invest in a pension is a tricky question and the answer takes in a number of factors. A pension may need to last you for 20 years of retirement, and how much you should invest will come to down to the lifestyle you wish to have in those 20 years. Another factor regarding how much to invest will be the age at which you started your pension.

Starting your Pension Fund

Financial advisors will tell you that a good pension fund will come to approximately the same cost as a family home. The fund needs to bring in an annual income that you can comfortably live on and pay all of your bills for around 20 years. In an ideal world we would all start putting money into our pension fund at around the age of 20 years old. But with today’s job market and continual employment changes, it is more common for people to wait until they are in their forties before seriously considering their pension plans.

The earlier you start investing in your pension the less you will have to put in, as you will be paying longer. If you want to receive approximately two thirds of your final working salary as your monthly pension then you will need to invest around 10% of your monthly salary when you are in your twenties. By the time you reach 45 this percentage will have jumped to 20% and by 50 years old this will be around 25%. The longer you delay paying a pension the more you will have to pay in the end.

Pension and Inflation

If you are considering how much should you invest in a pension, then think about inflation; the contributions that you pay into your fund should grow alongside inflation. No doubt the £50 that you place into your pension fund now will not have the same value as £50 in 20 or even 10 years time. Most pension advisers will offer pensions where the contributions will grow in relation to inflation; this is the wise choice in terms of how much real money you will actually receive.

In your total calculations also remember that you will no doubt be receiving a tax free lump sum from your pension fund total. Also when you calculate your final figure remember that you do receive tax relief on your contributions, and that the final outcome figure is only a guideline, this figure is what you may receive not what you will receive.

Why Paying More is Sensible

When you are in your twenties, the question of how much should you invest in a pension may not seem very important. Investing a chunk of your monthly wage when there are more important things to pay may not seem a desirable option. But think of it this way, if you are 20 years old and only pay £20 a month before tax relief into your pension, then at 65 you will only receive around £130 per month. If you are 40 years old and pay in £20 then your monthly pension will only be £50 per month.

The higher your investment the higher your return should be. So if you are a 20 year old who can afford to invest £200 a month your return at 65 will be around £1330 per month. A 40 year old who invests £200 per month will gain a monthly pension of £511; would this be enough for you to comfortably live on for 20 years?

Pensions and Lifestyles

When you are deciding how much to invest in your pension take a look at your lifestyle now and your intended lifestyle come retirement. Many things will change in retirement and financial concerns will be one of them. You may intend to have completely paid off your mortgage by the time you retire, which will mean no more mortgage payments and another investment in your overall assets.

You may also be looking to be completely debt free from any bank loans or credit cards that will reduce your monthly outgoings. Your leisure time will increase and as such do you intend to make the most of it with holidays and trips? Although a lot of your outgoing financial concerns may decrease, you will no longer have a regular monthly salary to live on; your pensions and investments are all you have take you through your retirement years.

At present the state pension for a single person is £87.30, and many retired people find it hard to live on a state pension alone. This is why wise investing and paying into an employee or personal pension plan is a must if you intend to have an adequate standard of living during your retirement years.

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I am absolutely confounded by the idea of putting money into an employer-based(traditional style) pension. If I pay in all that money I get a small tax break here and there, then when the pension comes due, I do not get any increases in my monthy pension in accordance with inflation. Nor, my friend, do I have the principal I started with to try and grow further. I simply and stuck with a lousy monthly payment that does not add up to much after 10-15 years of inflation. Plus, if I want access to all of the money for the purpose of some purchase or wim, I am not ALLOWED. What gives with pensions? Are they simply fishing nets thrown out by the very intelligent, already exceedingly wealthy investment bankers? Please describe how I'm wrong if I am, so that I may have faith in the social norms again.
RobertaHitch - 22-Mar-11 @ 10:02 AM
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