Maximise your pension, regardless of your salary

When you reach your retirement, your pension will provide you with an income. For it to be big enough to pay for your retirement, you will need to pay into it many years in advance, usually whilst you are still working. Pensions are fantastic because the money you contribute is usually further boosted by the government and/or your employer, and then it’s invested so that it grows over time. Essentially, you should realistically get back far more than you paid in.

It’s recommended that you pay as much money into your pension throughout your career as possible. But if you are earning a relatively low income, you may well worry whether you are able to really save a substantial amount at all.

Although there isn’t a specific pension scheme for workers on low incomes, the better news is that it is possible to retire with enough saved up to live off, even if you do have only earnt a low income throughout your career. In addition to this, the State Pension is also paid alongside your own personal or workplace pensions.

So how can you retire with enough money to live off? How much should you pay in? And what additional things could you do to really get the most from your pension? We took the advice of an independent financial advisor to learn about the many ways to maximise pensions for low income earners.

How much you really should be paying into your pension

Essentially, your pension will need to support your lifestyle throughout your retirement. So, if you do retire at 67 and live until 85, it needs to last 18 years.

Remember that your private pension doesn’t have to cover this cost on its own. If you haved worked for at least 35 years, your National Insurance Contributions will entitle you to a full State Pension of £9,339 each year.

How much to cover the essentials?

According to a recent survey, on average, you will need an annual retirement income of £13,000 to pay for essential living costs such as housing, groceries and utilities. For couples, you will need £18,000, or £9,000 each.

Keep in mind though that an essential lifestyle is pretty basic. It means shopping at the cheapest supermarkets, does not include leisure purchases or holidays. To be able to afford a more ‘comfortable’ lifestyle, which will include all these extras, Which? says single retirees need a £19,000 pension income each year and £26,000 for couples each year, or £13,000 each.

Whilst a retired couple might be able to pay for the essentials when relying on the State Pension alone, it is worth keeping in mind that the State Pension may well pay out less by the time you come to retire, the age at which you receive it is likely to keep rising too and then there is also the possibility that that government may scrap the state pension altogether. So, paying into a private pension can really help to mitigate this risk.

The age you begin paying into your pension does matter

To cover the estimated essential living costs of £13,000 each year, we have calculated that you would need to top up your pension by:

  • £60 per month from age 21 (includes the full State Pension)
  • £85 per month from age 31 (includes the full State Pension)
  • £200 per month from age 41 (includes partial State Pension)
  • £300 per month from age 51 (includes partial State Pension)

You will notice how fast the monthly pension contributions increase the later you leave starting.

To get the very best from your money, you should to start paying into your pension as early as you can. This will result in much better compounding – the effect of previous investment growth experiencing further additional interest growth. For example,  £100 that grows by 5% every year would be worth £105 after one year, £110.25 after 2 years, and so on. After 30 years, it would have grown not by £5, but £21.61.