Taking out a pension does not guarantee you a comfortable retirement. You have to pay enough into it to make it worth while. How much you need to pay in will depend on what type of pension scheme you are a member of and also whether you are self-employed or not.

You can pay as much as you like into your pension schemes. However, you’ll only get tax relief on up to 100% of your earnings if you are a UK taxpayer. For example, if you earn £20,000 but put £25,000 into your pension scheme, you will only get tax relief on £20,000.

You can get tax relief on a limited amount of contributions if you are not earning.

In addition, there is an annual allowance which limits the amount of money you can put in each year. This limit is set by HM Revenue and Customs and changes each year. The limit for 2008/09 is £235,000. Any contributions you make over this limit will be subject to an annual allowance tax charge which is currently 40%. The annual allowance will increase each year until 2010 when the position will be reviewed by the government.
There is a lifetime allowance which limits the amount you can accumulate free of tax in all your pension funds when you come to draw your benefits. This is £1.65m for the tax year 2008/09. You have to pay tax on any excess over the £1.65m allowance. This is set to rise in stages to £1.8m by 2010/11.

Salary–related pension scheme benefits are given a value which counts towards the £1.65m lifetime allowance.

Any amount above the lifetime allowance can be paid as a pension benefit but is subject to tax of up to 55%. You may still have to pay tax on your income when you start to draw the pension.

So, how much should you put into your pension?

Well, the earlier you start saving, the less money you need to save each month. To target a pension of £20,000 a year a 20 year old needs to save £99.50 a month, assuming average annual growth of 7% a year, says Legal & General. Leave it until you are 30 and you need to save £189 a month to target the same income. A 40 year old would have to save £383 a month and a 50 year old starting out would have to save a massive £895 a month to get a £20,000 annual pension.

For a better indication of what you may need to pay in to get whatever level of income you think you will need visit www.pensioncalculator.org.uk/

Don’t forget that while the State pension may be small – currently £4,139 a year for a single person and £6,617 a year for a couple, it should still be part of your thinking. To find out if you have paid enough National Insurance to qualify, contact The State Pension Forecasting Team, The Pension Service, Room TB001, Tyneview Park, Whitley Rd, Newcastle-upon-Tyne, NE98 1BA or call 0845 3000168.

Finally are there better options than paying money into a pension fund. Well the answer is a definate “maybe”. This would depend on your personal circumstances but there are options some of which could be provided by independent financial advisors and other which could be provided by alternative investments – such as property, fine art etc. If you would like to discuss these please send me an email and I’ll make contact.

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