How much should I contribute towards a pension?
On a day of public pension strikes, I thought some comments on pensions (especially private vs public) would be a topical subject.
If you are confused as to how much to contribute towards your pension, then you are in the majority. When I was working in the City, I used to think that my employer’s contribution (3% of salary) plus a contribution from me (another 3%) which was matched by my employer (bringing the total to 9%) would be fine.
Not only is it not fine (as we’ll see), but the new Auto-enrolment rules will enforce a new minimum 8% total contribution, part from the employer part from the employee. There are real concerns that there will be a race to the bottom, with employers taking the opportunity to default to the 8% minimum where they were offering more before.
According to recent research, a 35 year old with a Basic State Pension and an 8% minimum auto-enrolment contribution will receive an income in retirement at age 65 of approximately 43% of final earnings. Bear in mind that typical final salary schemes are set at 2/3rds of final salary.
The following table should help you put this into perspective, courtesy of the Hutton Review and the Office for National Statistics. You may start to lose sympathy with the public sector picketers, assuming you had any to start with:
Public vs Private Sector Pensions:
|Civil service||1.5%||18.9%||20.4%||60 – 65|
|Teacher||6.4%||14.1%||20.5%||60 – 65|
|Average private sector DB*||4.9%||16.6%||21.5%||65|
|Average private sector DC**||3%||6.1%||9.1%||55 – 75|
* DB = Defined Benefit (i.e. ‘final salary’)
** DC = Defined Contribution (i.e. ‘money purchase’)
These are the opinions of Kennedy Black Wealth Management only and do not constitute advice. Should you wish to discuss how this may affect your own circumstances, please contact your Personal Finance Consultant at your earliest convenience.