FREE Pension Calculator Download and UK Pension Advice

I have wanted to retire ever since my first day of work back in 2007. Now, over a decade later, not a lot has changed. Unfortunately, I am in no position to quit the 9 – 5. But I am in a position to make it happen sooner rather than later. How, I hear you ask? By making regular contributions to my pension. For the longest time pensions confused the hell out of me. How much should I contribute to my pension? What is the difference between different pension products? Why will I only be able to retire when I’m 150 years old? That is why we have created a simple guide to help you understand how to make your pension work for you. Our pension calculator is FREE to download, and will help you decide will help you calculate which contribution amounts are right for you.

What is a pension plan?

A pension plan is, in theory, a simple product. It is a pot of money that both you and your employer can pay into – and which you get tax relief on – in order to save for your retirement.

Then, when you retire, you can either draw the money out of your pension pot or exchange it with an insurance company in exchange for a regular income until death, called an annuity.

Since 2015, you have been able to access your pension pot from the age of 55, taking as much or as little out of the pot as you like depending on your needs.

But it is important to understand how contributing to your pension can affect your income now. By investing in your pension, you are essentially taking a pay cut now in exchange for a future income when you no longer want to, or are able to, work. Consider this carefully and use my free pension calculator to calculate what you can afford.

Is a pension even worth it?

Only you will know whether a pension is right for you, but generally, the answer is yes. We have no way of knowing what will happen in the future, so it is better to know we have a pot of savings waiting for us if we reach a point where we are no longer able to work.

Another huge perk of contributing to your pension is tax relief. Every penny you contribute to your pension is done so tax-free, saving you 20% on the tax you would have paid had you received the money straight away. Even better news – if you are in a higher tax band you can claim an additional 20-25% back on the tax you paid. If you are part of a workplace pension, you may not need to reclaim any tax if your employer simply deducts less tax from your pay packet. With other pensions, however, if you don’t reclaim, it won’t be paid. For more information on how to reclaim tax, see HMRC.

How much should you contribute to your pension?

With auto-enrolment workplace pensions, there are minimum contribution levels. But if you can afford it, you should contribute more.

The best way to save for retirement is to save as much as possible as early as possible. However, a general rule of thumb for what to contribute is to take the age you started contributing to your pension and half it – then put that percentage of your pre-tax salary into your pension pot. For example, if you start paying into your pension at age 26, you should aim to contribute 13% of your pre-tax salary each year for the rest of your working life.

This figure can seem daunting at first, but it is worth remembering that this figure also includes your employer’s contribution. All you need to do is fund the rest. But, as in most cases, the situation is rarely that simple. That is why I recommend using my free pension calculator to work out how much you can afford to contribute each month. Don’t take the plunge and contribute more than you are able to.

Important: It is worth noting that those in debt, especially at high rates of interest, should consider whether they would be better getting rid of the debt before starting a pension or savings account. It is often the case that the debt grows faster than your savings do, making it even harder to shift.

But remember, a pension is only one form of saving for your retirement, there are plenty of other options out there that you may also wish to consider.

What is auto-enrolment?

Auto-enrolment now requires all UK employers to offer employees a pension. This law requires them to automatically enroll you into a pension scheme and, most importantly, contribute on your behalf.

From April 2019, employers are now required to contribute a minimum of 3% of your pre-tax salary into your pension. However, under auto-enrolment, total contributions must reach a total of 8%, meaning you will have to contribute the remaining 5%.

Remember that just because you are auto-enrolled into your workplace pension doesn’t mean you have to stay in it. You can choose to opt-out of your pension at any time. However, consider this carefully before doing so, as not only will you lose the additional 3% your employer pays in on top of your salary, but you will also have to pay tax on the money you choose to receive now instead of putting into your pension pot.

What is salary sacrifice?

Salary sacrifice, as the name suggests, is where you sacrifice some of your pre-tax salary and ask your employer to put it towards something else. Salary sacrifice can apply to a number of benefits like child care vouchers and cycle-to-work schemes, not just pensions.

The salary sacrifice comes out of your pre-tax income, meaning you can enjoy an extra tax break by contributing more of your salary into your pension. Most employers are happy to take part in this scheme as it means they also pay less national insurance.

Important: One thing to take into consideration is that salary sacrifice can also have knock-on effects. For example, it could reduce your earnings so that you would no longer apply for statutory maternity pay. It can also affect other things like mortgage applications, jobseekers’ allowance and employment and support allowance. So always do your homework to make sure salary sacrifice will be beneficial to you.

Should I take my employer’s pension?

If you are employed (aged 22 or over and earning at least £10K a year) you will be automatically enrolled into your employer’s pension scheme, as mentioned above. Your employer will have to contribute 3% of your pre-tax income into this pension pot each year, which is essentially a free pay rise. Yipee!

As before, there is no tax to pay on pension contributions, so weigh up your options before deciding whether you want to opt-out. It may not be money you can enjoy right now, but it is something you will have access to in the future.

Of course, it may be the case that you do not have enough disposable income to be able to contribute towards your pension. Use my pension calculator to help you decide if opting-out is the right thing for you.

What are the different types of pension plans?

There are more pension options than the one offered by your employer. There are lots of different pension products available, but the main ones are:

Final Salary pensions

These pensions, also called defined benefit schemes or CARE schemes, are usually funded by employers, though staff may have to pay into them. As the name suggests, with a Final Salary pension you receive a percentage of your final pre-retirement salary as annual income after retirement. These kinds of pensions are almost impossible to find nowadays because of the large cost associated with them. However, you may know some retired people who were lucky enough to get one of these.

Money purchase pensions

Money purchase pensions, also known as defined contribution schemes, are a popular option. The money you invest in your pension plan is invested. This is done over many years, and the value of your pension can increase as well as decrease. The amount of money available to you when you retire is dependent on how well those investments performed.

Workplace pensions

When both you and your employer make regular monthly payments into a pension fund, that money is then invested by a pension company eg. Scottish Widows until you hit retirement. There are two types of workplace pensions: trust-based and contract-based.

Trust-based pensions

A board of trustees manage investments on your behalf. These types of pensions are usually paid into by yourself, and possibly your employer. The pension is operated outside of your control, separate from the company. One advantage is it allows benefits to be handed to your partner or other dependants.

Group personal pensions

These are operated by a third-party insurer who is not required to act on your best interests. These are usually set up and chosen by your employer, but you will likely be given a choice of investments.

Stakeholder pensions

These are similar to workplace pensions, but have low and flexible minimum contributions, capped charges and a default investment choice. You won’t have to decide where to put your cash.

Self-invested personal pensions

These work in the same way but are DIY pensions, allowing you to choose your investment. If you are willing to do all the work yourself you can run a Sipp on the cheap, but be careful and make sure you choose the right provider.

What about the state pension?

Your state pension will become available to you when you reach state pension age. This is currently set at age 66 but keeps on rising. You build up entitlement to the state pension by paying national insurance (NI) contributions throughout your working life or by being awarded NI credits.

Can you also save into a Lifetime ISA?

Yes, if you are under 40 years old you can save up to £4k a year into your Lifetime ISA and the government will contribute an additional 25% on top of whatever you save. This means you can get up to an extra £1k a year towards your first home or later years.

Before you invest in your Lifetime ISA there are penalties if you access your money before purchasing your first home or retirement, meaning you would lose £6 for every £100 you invest into your Lifetime ISA.

You can also use a Lifetime ISA to save for your first home. Check out our blog post on saving money for a house deposit for more information!

Download our FREE Pension Calculator

I have created a pension calculator for you to download completely free. By using the calculator, you will be able to quickly and easily:

  • Calculate how much money you can afford to contribute to your pension each month.
  • See how much you would save in tax and national insurance contributions with your new pension contribution.
  • Clearly understand how much you and your employer pay each month.
  • Set simple goals towards your retirement savings.

The free pension calculator is available on Google Sheets which is accessible to everyone and completely free to use.

Please note: This post was accurate as of September 2020. UK pensions change regularly so we recommend seeking financial advice before purchasing any pension products. Sophie On Demand does not offer financial advice and nothing in our posts should be construed as advice.  Our publications provide information and education for individuals who want to know more about their saving and money making options.