You may have heard of the "half your age" pension rule. But what exactly is it, how does it work and how do you apply it in practice?
The “half your age” rule of thumb says that when you first start to save for retirement, you should save a percentage of your pre-tax salary equal to half your age.
So, if you get your first full time job and start contributing to a pension at 22, you should put 11% of your salary into your pension. Easy.
The earlier you start, the better
Now the good thing about pensions in the UK is that your employer contributes too, so not all of that 11% has to come from you. In this example, you could contribute 7% and your employer could pay 4% to bring you up to 11%. Every employer has different matching arrangements and pension benefits, so it’s important to figure those out when you join a new job so you’re not missing out on free money for your pension.
Importantly, if you start off on track, the percentage does not have to increase as you get older. This is commonly misunderstood and misquoted. So in this example, if this person started early and arranged the 11% to go into their pension from 22, they would just have to keep contributing 11% consistently for life. One of the selling points of the “half your age rule” is that the earlier you get started the better.
Hitting retirement goals
Everyone’s career path and salaries look different, but the idea with the “half your age” rule of thumb is that it should give you a fighting chance of being able to get 2/3 of your final salary as your pension at age 65.
So if your last salary before retiring is £60k and you followed the rule throughout your life, you should have a decent chance of having a pension that can produce £40k per year.
Now the rule isn’t perfect, but it’s a good guide to help you understand how much to save. It also shows us two things:
- As mentioned above, the earlier you start saving, the less you have to set aside each month, and
- The 8% mandated by auto-enrolment is not enough for a “comfortable” retirement.
Taylor it to your ambitions
It’s worth saying that this rule may not work for everyone – we all have different goals. If you’re working towards building a pension that would afford you more of life’s luxuries at retirement, or are even looking to retire early, then the “half your age” rule shouldn’t be the sum total of your ambitions. Many people choose to increase their pension contributions by a percentage when they get a pay rise or make additional contributions when they receive a bonus.
If you’re not following the “half your age” rule, don’t beat yourself up about it! It’s simply a way to give yourself a benchmark and make sense of how much you should aim to save. For what it’s worth, I did not follow this rule when I started saving for my pension. It wasn’t until I got a better paying job with decent pension contributions that I was able to increase my contributions. Sometimes you might be behind it but sometimes you might be ahead and maybe you can give yourself the odd pension top up over the years.
Get started today
Whether you use the “half your age” rule or not, we know that the sooner you start saving for your retirement, the better off you’ll be today and in retirement. With a Moneybox Pension, you’ll be able to find and combine your old pensions, get 25% top ups on everything you contribute automatically, and see all your money in one place. Learn more about building a retirement worth waiting for with Moneybox at the link below.