How much to save into a pension

Wednesday, 10 February 2016

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Edinburgh independent pension advice

We manage (as of January 2016) around £14m of our clients’ money in the investment markets, and most of this is held in pensions. But in general it is sadly the case that people are not saving enough for retirement, sometimes because they don’t want to, and sometimes because they can’t afford to.

How much should you save? It depends on a whole list of things specific to your circumstances, but we can make some generalisations. Author and former investment consultant Don Ezra estimates ( , using some fairly conservative assumptions, that if a 25 year old puts away 5% of his salary each year, for 40 years, into a low risk pension fund that matches inflation, he will end up with a pension income of 10% of his final salary. For most people, seeing their income fall by 90% when they retire is not an attractive prospect.

For that 25 year old to get a pension income of 40% of his final salary (a bit more acceptable, though perhaps still requiring quite a cut in lifestyle) he would have to save 20% of his salary each year over his career, into a pension fund that just matches inflation each year.

You are unlikely to save more than 20% of your salary into a pension each year, and may not save anywhere near this much. That leaves two options – either retire later, or take on more investment risk in your pension, in the hope that investment returns will boost your pension pot significantly over the long term. This is why it is very sensible to take some risk with your pension investments, for most people.

The downside is that this exposes you to short term falls in the financial markets. However, if you are investing over a 10, 20, 30 or even 40 year period, you can afford to ignore these periods of weak performance. This can be tough – seeing the value of your investments fall is never easy – but as long as your portfolio is designed correctly, and matches your attitude to risk and personal circumstances, letting stockmarket crashes scare you into selling up is the last thing you should do.

Similarly, letting strong market performance lure you into piling more money into the stockmarket is also not the way to go. As long as you have a balanced portfolio that suits your needs then market movements should, where possible, never be a trigger for you to change your investments. Your portfolio should usually hold a mix of low, medium and high risk assets, with the weighting of each tailored to your particular needs. But that mix will be fairly similar whether the markets are high or low.

If you want to know how we design bespoke investment and pension portfolios for our clients, using our in-house risk assessment and asset allocation methodology, please get in touch. Similarly, if you just want to know what your likely retirement income is based on what you are saving now, we can help.

Independent financial advice. Regulated by the Financial Conduct Authority (FCA no. 603653). Company no. SC450460