Saving for retirement

What’s a pension?

A pension is essentially a long-term savings plan designed to provide you with an income during your retirement. Throughout your working life, you or your employer (or both) may contribute money into a pension fund. This money is then typically invested to grow over time. Once you retire, you can access this money – either as a regular income or a lump sum – to cover your expenses when you’re no longer working. Pensions benefit from tax advantages, making them an efficient way to save for the future.

Is a pension the best way to save for retirement?

Most people consider a pension to be the best way to save for retirement. 

Here are a few of the main benefits: 

• If you have a workplace pension, your employer has to contribute to it if you’re eligible for auto-enrollment. The minimum contribution from your employer is 3% of your annual salary, but some employers will go even higher and match your contributions. This is essentially free money towards your retirement savings!

• You can get tax relief on pension contributions. When you save into a pension, the government helps by giving you tax relief. Basically, this means some of the money you’d normally pay income tax on goes straight into your pension pot instead. Think of it as a little boost to your savings! There’s a limit to how much you can get tax relief on each year. For most people, this is either £60,000 or your total yearly income – whichever is smaller. But there are a few situations where this limit might be different. For example, if your income is under £3,600 or over £200,000, so it’s important to check on the government website.

• Many pensions allow you to take a tax-free lump sum when you retire. Usually 25% of the total pension value, up to £268,275. 

What are the different types of pension?

There are many different types of pension including State, workplace and personal:

• The State Pension is a regular payment from the UK government that you can claim when you reach State Pension age. Currently this is set at 66 years old, but it’s rising to 67 in 2036 and 68 in 2048. The amount you receive depends on how many years you’ve paid National Insurance contributions.

• Workplace pensions are set up by your employer and they often contribute on your behalf. The money you pay in is taken from your wages before tax. There are two main types of workplace pension: 

  • Defined contribution: the amount you get at retirement depends how much was paid in by you and your employer, and how well the investment has performed over time. 

  • Defined benefit: the amount you get at retirement is based on your salary and how long you worked for the company, not on investment performance. It promises a specific income for life. This type of pension is less common these days.

• A personal pension is one that you set up yourself. A SIPP (Self-Invested Personal Pension) is an example of this. With a SIPP, you decide how much money you put in and when, along with how it’s invested. If you’re self-employed, you might want to think about setting one up since you won’t have a workplace pension. But they’re not just for the self-employed – you can have both a SIPP and a workplace pension if you want to.

Should I consolidate my pensions?

If you’ve worked at a few different companies, it can be easy to lose track of your workplace pensions. To make them easier to manage, you can consider moving all your pensions into one place. You might be able to do this through your current workplace pension provider or through a pension consolidation service. If you have a Monzo account, we can help you track and combine your pensions.

How much should I save for retirement? 

How much you need depends on lots of different things, and is incredibly personal to you.  Things like whether you own your home outright or need to pay rent, whether you plan to work part-time in retirement, and the cost of living in your local area will all be factors in how much you need. 

As a guide, research from the Pensions and Lifetime Savings Association (PLSA) says that, as a single person, you’ll need at least £14,400 for a minimal standard of living. £31,300 a year will give you a moderate standard of living, while £43,100 a year will provide you with a comfortable standard of living. This doesn’t account for inflation or increased cost of living by the time you retire, so if retirement’s a long way off for you, these figures will likely be higher. 

If you receive the full rate of the new State Pension, you’ll get £11,502 per year from the government.

When should I start saving for retirement? 

There’s no one size fits all answer, but the earlier you start, the better. This is because of something called compounding returns. 

Compounding returns are essentially ‘returns on returns’. When your investments earn money, those earnings then start earning their own money over time. It’s like a snowball effect – your initial investment grows, and then the growth itself also starts to grow! This snowball effect is particularly powerful over long periods, like when you’re contributing to a pension.

But if you’ve not started contributing to a pension yet and are playing catch up, you can try this formula… take your age, divide it in half, and contribute that percentage for the rest of your employment.

For example: if you’re starting at 34, take 17% of your income for the rest of your employment, and send it to a pension pot. If you’re starting at 40, you’ll need to contribute 20% for the rest of your employment, and so on.

Remember, if you have a workplace pension, your employer will match your contributions up to 3% (and sometimes even more.) So you won’t have to contribute the whole amount yourself.

Make the most of employer contributions

If you have a workplace pension, your employer’s contributions (a minimum of 3% of your annual salary) can give your pension pot a sizeable boost. Plus, some employers will contribute more when you do or match your pension contributions, so it’s a good idea to check out what they offer and ensure you’re getting the most ‘free money’ you can! 

Review how your pension is invested

Many people don’t realise that their pension is an investment, and so it’s worth reviewing how it’s invested. Your pension provider will typically offer you a default investment option, but they may also have a range of other investment options to choose from, all with different levels of risk and potential reward. Generally, people can afford to take more risk with their pension when they’re younger, and less when they’re older.

Should I use a Lifetime ISA to save for retirement?

A Lifetime ISA (LISA) is a type of savings account that’s designed to boost your retirement pot. It’s not supposed to replace your pension – you can save with both.

The benefit of a LISA is the government will boost your savings 25%. You can put a maximum of £4,000 into the account every year, meaning you can get an annual bonus of up to £1,000.

Just make sure to do some research before taking this option – if you have a workplace pension, you’ll probably get more from employer contributions and tax relief. But if you’re self-employed, a LISA can be an attractive option in addition to saving in a SIPP.

You need a free Monzo current account to open a Monzo Pension. 18-70 years old only. UK residents only. Ts&Cs apply.

This isn't financial advice or personalised to you, and we're not recommending or suggesting you take any particular action. If you're in any doubt about what's right for you, then speak to an authorised financial advisor.

Tax treatment depends on individual circumstances and may change in the future.

The value of your investment can go up and down and you could get back less than you put in.