Martin Lewis explains ‘rule of thumb’ of how much to save for a ‘strong income’ in retirement
Mr Lewis states that salary sacrifice is worth considering if one’s employer offers it
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Martin Lewis has explained his “rule of thumb” on how much people should be saving into their pension.
Writing in his Money Tips newsletter, the money saving expert warned readers that “almost nobody does this” but urged them to start saving as early as possible.
The more one saves, the more disposable income they will have in retirement, and they will be able to live the way they want in retirement.
Lewis said: “Take a deep breath before you read this... as a very rough rule of thumb, take the age when you start putting money in your pension, halve it, and that's the per cent of your salary to aim to put into your pension for the rest of your working life for a strong pension income.
“So, start at 20 and its 10 per cent (this includes employer's contributions), at 40 it's 20 per cent.
“Don't worry, almost nobody does it! The real takeaway is how the earlier you start, the better, as you've longer for the gains to compound.
To ensure people are saving enough, it’s important to know what contribute for a comfortable retiremen
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“And every time you get a pay rise, if possible, put a chunk of that into your pension before you get used to the increase.”
Some people may be unable to contribute enough at the beginning for the 'half their age' rule, so he encourages savers to just start with whatever they can.
However each time they get a pay rise, he encourages people to put a quarter of the extra monthly cash into their pension.
With auto-enrolment workplace pensions, there is an eight per cent minimum contribution level that each person contributes with their contributions and their employer.
To ensure people are saving enough, it’s important to know what contribute for a comfortable retirement.
The Pension and Lifetime Savings Association latest figures show that a single person will need £12,800 a year to achieve the minimum living standard, £23,300 a year for moderate, and £37,300 a year for comfortable. For couples it is £19,900, £34,000 and £54,5001.
The minimum living standard covers most people’s basic needs plus enough for some fun. For example, they could holiday in the UK, eat out about once a month and do some affordable leisure activities about twice a week.
The moderate lifestyle provides more financial security and more flexibility than the minimum lifestyle.
For example, they could have a two-week holiday in Europe and eat out a few times a month.
At the comfortable level, people could enjoy some luxuries like regular beauty treatments, theatre trips and three weeks in Europe a year.
Paying into a pension gives taxpayers a tax break.
But for an “extra and easy bonus”, Lewis states that salary sacrifice is worth considering if one’s employer offers it.
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Salary sacrifice applies to a number of workplace benefits such as childcare vouchers or cycle-to-work schemes, not just pensions.
Britons give up a portion of their monthly earnings and their employer puts it towards something else – for example, pension contributions.
As it comes out of pretax salary and straight into one’s pension, savers pay less National Insurance (NI).
Their employer will also pay less employer's NI which gives them an incentive to operate the scheme.