Most of us treat retirement planning like a problem for a future version of ourselves.
However, Martin Lewis is warning that keeping your head in the sand is a recipe for a very bleak old age. The Money Saving Expert’s rule of thumb for pension contributions is a bit of a wake-up call, especially when you realise that the State Pension alone is barely enough to cover a basic existence, let alone a comfortable life.
Picking a random number to aim for isn’t helpful or necessary; it’s really about understanding the specific percentage of your salary you need to lock away, based on the age you actually started saving. If you’re worried you’ve left it too late, or you’re confused by the jargon, here’s the straightforward breakdown of the maths you need to know to ensure you’re not working until you’re 90.
The rule Martin Lewis is talking about
Take the age you are when you first start paying into your pension, halve it, and that’s the percentage of your salary you should be putting into your pension for the rest of your working life. So if you start at 20, that’s 10% of your salary. If you start at 30, it’s 15%. If you start at 40, it’s 20%.
The percentage includes anything your employer is putting in too, so it isn’t all coming out of your own pocket. The earlier you start, the smaller the percentage, which is the whole point of the rule.
Why this works in practice
The reason starting young makes such a difference comes down to how pensions grow. The money you put in gets invested, and over time the growth on that money starts earning its own growth on top. This is called compounding, and it’s properly powerful when you give it enough time.
A 20-year-old putting away 10% of their salary for 45 years usually ends up with far more at retirement than a 40-year-old putting in 20% for 25 years, even though the older person is putting in twice as much each month. Time is doing a huge amount of the heavy lifting.
What it actually means in pounds
Putting some real numbers on it makes the picture clearer. A 40-year-old on the average UK salary for their age, which is around £40,040, would need to put in around £8,008 a year into their pension. For a 20-year-old on the average wage of £22,932, the figure works out at £2,293 a year.
These amounts include employer contributions, so the amount coming out of your own pay packet is smaller. The exact figures change depending on how much you earn and how much your employer adds, but the general shape stays the same.
Why most people won’t actually hit these numbers
Martin Lewis was honest about the fact that most people won’t manage to save this much, particularly in their twenties and thirties, when wages tend to be lower and the costs of life are usually high. Rent, mortgages, children, holidays, and just getting by all chip away at what’s left over for a pension.
The MSE website itself says that most people can’t hit the “half your age” target at the beginning, and recommends starting with whatever you can. The point of the rule isn’t to make you feel terrible, it’s to give you a clear picture of what a properly comfortable retirement actually costs.
Why starting early matters more than starting big
The big takeaway from Martin’s advice is that the earlier you start, the easier it gets. Someone who starts paying into a pension at 22 and puts in 11 per cent of their salary will likely end up better off than someone who panics in their forties and starts paying in 20 per cent.
The maths just works in your favour when you give the money decades to grow. If you’ve got young adults in your life who haven’t thought about pensions yet, getting them to start small now will do more for their retirement than any amount of catching up later.
Save a percentage, not a fixed amount
One of the smaller but really useful bits of advice in Martin’s newsletter is to think of your pension contribution as a percentage of your salary rather than a fixed monthly amount. If you set up a direct debit for £100 a month at 25, that same £100 will feel like much less when you’re earning twice as much at 45.
Setting your contribution as a percentage means it grows automatically as your wages do, and you’ll never need to keep remembering to bump it up. Most workplace pensions are already set up this way, so check yours and see what your current percentage is.
The pay rise trick
Martin’s other useful tip is about what to do every time you get a pay rise. The advice is to put a chunk of the rise straight into your pension before you get used to the new bigger pay packet. The reason is something called lifestyle creep, which is the slow tendency to spend more whenever you start earning more.
If your pension contribution goes up at the same time as your pay does, you don’t actually feel the difference because you’ve never had that extra money in your account in the first place. Future you will be properly grateful, and present you barely notices.
How to find any old pensions you’ve forgotten about
One bit of useful housekeeping if you’ve changed jobs a few times is to check whether you’ve got any lost pensions floating around with old employers. Most workplaces auto-enrolled their staff into a pension scheme, which means you might have small pots sitting with companies you worked at years ago.
The government runs a free pension tracing service at gov.uk that helps you track these down. Pulling them all together, or at least knowing where they are, gives you a much clearer picture of where you actually stand.
What to do if you’re behind
If you’ve read this and realised you’re nowhere near the “half your age” target, you’re in the same boat as most of the country. The first step is to find out exactly what you’re currently paying in and what your employer is matching. Many workplaces will increase their own contribution if you up yours, which is essentially free money you might not be claiming.
Even small bumps make a real difference over the years. Going from 5% to 7% doesn’t feel like much month to month, but it adds up properly by the time you actually retire.
