Make your money go further
Find the best deals, avoid scams, and grow your savings with our expert guidance. From only £4.99 a month.
Join Which? MoneyCancel anytime.
By clicking a retailer link you consent to third-party cookies that track your onward journey. This enables W? to receive an affiliate commission if you make a purchase, which supports our mission to be the UK's consumer champion.
How small boosts can add thousands to your pension pot
Workers urged to consider pension benefits when changing jobs
Workers are being urged not to overlook pension benefits when considering job offers, as new analysis shows enhanced employer contributions can add thousands to retirement savings.
Employers are required to contribute a minimum of 3% of the employee's salary into their workplace pension. However, many offer more generous schemes, and new research shows that a 5% contribution could add nearly £50,000 to a worker's pension pot over their career.
Here, we explain how small increases can make a big difference in retirement, and highlight why you might want to consider increasing your own contributions.
How much does your employer contribute?
Since October 2012, employers have been required to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
Under auto-enrolment, your employer must contribute at least 3% of your salary and you must contribute 5%, making a total of 8%.
However, if your employer pays in more than the required minimum of 3%, but less than the total minimum contribution of 8%, you only need to contribute enough to make up the difference.
For example, if your employer contributes 6%, you would only need to contribute 2% to reach the 8% total minimum contribution.
- Find out more: auto-enrolment explained
The difference additional contributions could make
According to pensions provider Standard Life, even small increases on the minimum contribution can make a big difference over time.
For example, a worker aged 22 with a salary of £25,000 contributing the minimum rate (5% employee, 3% employer) could build a retirement fund of £192,000 by age 66, adjusted for 2% inflation over their career.
However, if they worked for a company offering a more generous 5% contribution, their pension could grow to £240,000 – an increase of £48,000.
The table shows how bigger employer contributions can boost your overall retirement fund.
| Employee contribution | Employer contribution | Total retirement fund aged 66* |
|---|---|---|
| 5% | 3% | £192,000 |
| 5% | 4% | £216,000 |
| 5% | 5% | £240,000 |
| 5% | 6% | £264,000 |
| 5% | 7% | £288,000 |
| 5% | 8% | £312,000 |
| 5% | 9% | £336,000 |
Source: Standard Life.
*assuming £25,000 starting salary, 3.5% salary growth per year and 5% a year investment growth. Figures are reduced to take in the effect of inflation. Annual Management Charge of 0.75% assumed. The figures are an illustration and are not guaranteed. Earning limits not applied
Should employers pay more?
Although auto-enrolment has been successful, concerns remain that many workers are still undersaving for retirement. Estimates suggest that 17 million UK adults are not saving enough to meet their retirement goals, according to research from the Phoenix Group, the owner of Standard Life.
One solution could be to increase employer contributions. In Australia, for instance, employers are required to contribute 11.5% of employee salaries to pensions, with this figure rising to 12% next year.
However, any increase in the UK would need to be balanced against the financial challenges it could create, particularly for small and medium-sized businesses.
Last year, the Living Wage Foundation introduced the Living Pensions standard, recommending a savings target of 12% of a worker’s salary, with at least 7% contributed by the employer. So far, more than 50 employers have voluntarily signed up.
The UK government’s ongoing Pensions Review aims to improve investment returns and address inefficiencies in the system. While auto-enrolment isn’t the main focus, experts suggest the review could pave the way for higher employer contributions in the future.
- Find out more: how to plan for retirement
When to increase your pension contributions
It's not just your employer that can boost your pension. Making additional voluntary contributions (AVCs) yourself can significantly boost your retirement pot.
Under auto-enrolment rules, you can increase your contributions at any moment. This isn't always an easy decision, but there are certain moments when it may be worth considering.
If your employer will match them
Some employers will match any extra contributions you make to your pension, offering an opportunity to grow your savings more quickly.
Most employers cap their matching contributions, but even a 1% increase from both sides can make a difference in the long run.
- Find out more: how long does my pension need to last
When you get a pay rise
A pay rise is an ideal opportunity to increase your pension contributions. Some employers offer salary sacrifice schemes, allowing you to channel part of your pay rise or bonus into your pension automatically.
This can be an easy way to increase your retirement savings without feeling the impact on your take-home pay.
- Find out more: how much you need for retirement
If you want to pay less tax
Using salary sacrifice can also be a smart way to reduce income tax and National Insurance (NI) contributions.
If you choose this option, you and your employer agree to reduce your salary by the amount of your pension contribution. Your employer then pays that amount, along with their own contribution, directly into your pension.
Since your salary is effectively lower, both you and your employer pay reduced NI contributions, which often means your take-home pay may actually be higher.
- Find out more: salary sacrifice schemes explained
If you're having a baby
Maternity leave can reduce your income and, by extension, your pension contributions. However, with a bit of planning, you can catch up.
You could increase your contributions before going on leave, when you return, or both.
If one partner earns more, the higher earner can also contribute to the other partner’s pension to help balance both pots. This way, both partners can maintain their pension savings during periods of reduced income.
