An important warning to every employee in the UK

It costs just £40 to get £100 added to pension savings

If like most people you earn over £11,000 (and under £43,000), you pay basic 20% rate tax on all income above that, meaning for every £50 you earn you only take home £34 due to tax AND national insurance.

But pension savings come from PRE-TAX salary, so putting £50 a month in your pension only reduces your pay packet by £40 (£30 for higher 40% rate taxpayers). Plus, as often employers will match the £50 you put in, to get a total of £100 a month added to your pension, it only costs you £40 (or less with salary sacrifice, see below).

Over a year at this level of saving you’d pay £480 but your pension would have £1,200 added to it. That’s unbeatable.

How much should you save towards your pension?

Be prepared to have the pants scared off you. There’s a very rough rule of thumb that shows how much you should put in your pension for a comfortable retirement – roughly half to two-thirds of your final salary.

1. Take the age you started your pension and halve it.
2. This is the percentage of your salary that needs saving each year until you retire (thankfully it includes your employer’s contribution too). So someone starting aged 20 would need 10%, aged 30 would need 15%.

For most people these amounts are impossible, so don’t get too hung up on it. Instead just use it to realise that a) the sooner you start the better b) put in as much as you can afford.

One trick to boost your pension contribution, if you’re lucky enough to ever get a pay rise – immediately put a quarter of the new money towards your pension. That way, because you’re not used to earning it, you won’t miss it as much (I call this the forgotten gold technique!).

Pension cash can be taken from age 55

Pension money can now be taken at 55, but it’s better to leave it until you need it. You’re usually allowed to take 25% of your pension as a tax-free lump sum. And with the rest you can simply withdraw it as cash if you want, but you must pay income tax on that.

The danger is, if you take too much out in one year, it pushes you up a tax bracket, which means you pay more than needed, so it’s important to plan how you get the money out. Full help in my free taking your pension booklet.

You may be able to get even more via pension salary sacrifice

This is where you give up monthly earnings, say £1,000, and ask for your employer to contribute it to your pension instead. This gains you and your employer reduced national insurance contributions, which means you get more in your pension. So if we look at the example above, instead of it costing £40, it could actually only cost you £34 to put £100 into your pension (including the employer’s contribution).

In some cases generous employers will add the gains it’s made from national insurance into your pension too, adding even more.

However, it is worth remembering that technically this means your ‘salary’ has been reduced a touch, which while usually not an issue, could also affect eligibility for mortgage applications, state pensions and benefits, such as jobseeker’s allowance and employment and support allowance.