Interactive Investor

Are you making the most of your workplace pension?

Employer company pension contributions can make a life-changing impact to your financial future. Alice Guy and Craig Rickman crunch some numbers and explain how you can get the most from your workplace scheme.

31st January 2024 14:04

by Alice Guy and Craig Rickman from interactive investor

Share on

Commuter on her phone 600

There’s no way to sugar-coat it; saving enough money to support you throughout retirement is no walk in the park.

Based on research conducted by the Pension and Lifetime Savings Association (PLSA), a couple needs to accrue a combined pot of around £600,000 to live comfortably in later life. Unless you inherit a sizeable financial windfall before you pack up work, amassing this sum rarely happens by accident.

While it would be unfair to suggest some workers had it easy in the past, the phasing out of defined benefit pensions (DB) - which secure a guaranteed income based on your final or career average salary - in the private sector, has certainly made the challenge steeper.

Workplaces have replaced DB schemes with the defined contribution (DC) model, where your retirement pot is based on how much you save and the success of the investments you choose. But importantly, DC pensions offer no guarantees which means you must actively engage with your savings or run the risk of falling short.

On a positive note, due to certain mechanisms within the pension space, you don’t have to undertake all the work yourself. Upfront pension tax relief can give your savings an immediate boost, and provided you’ve paid sufficient national insurance contributions (NICs) you should get a pension from the state.

There is further support for employees. Under auto-enrolment laws, if you pay 5% of your salary (within certain limits) into a pension, your employer must contribute at least 3% - bringing the total to 8%.

Some workplaces are more generous and will contribute above the minimum levels. You might have to match what they pay, but this can often be prudent as it’s effectively free money.

The upsides of maximising your company pension cannot be understated. It really can make a life-changing impact to your long-term financial health and retirement income. Let’s examine how big that impact could be.

The impact of employer contributions

We crunched some numbers to find out the impact of various employer contributions on employees with varying levels of income over a 40-year career span. As the table shows, over the course of your working life, employer pension contributions can really mount up.

We have calculated the impact on three salaries (£20,000, £35,000, and £50,000), assumed 5% growth a year net of fees, and that contributions increase 2% a year.

8% pension contributions (employee 5%, employer 3%)14% pension contributions (7% matching)20% pension contributions (10% matching)
Annual salary
£20,000Employee net payment£66.7£93.3£133.3
Employee gross payment£83.3£116.7£166.7
Employer payment£50£116.7£166.7
Combined contributions£133.3£233.3£333
Value of pension contributions after 40 years£263,000£474,833£658,000
£35,000Employee net payment£116.7£163.3£233.3
Employee gross payment£145.8£204£291.7
Employer payment£87.5£204£291.7
Combined contributions£233.3£408£583.3
Value of pension contributions after 40 years£461,000£806,654£1,153,000
£50,000Employee net payment£166.7£233.3£333.3
Employee gross payment£208.3£291.7£416.7
Employer payment£125£291.7£416.7
Combined contributions£333.3£583.3£833.3
Value of pension contributions after 40 years£658,000£1,188,056£1,647,000

Assumptions: pension payments made monthly, 5% annual investment growth net of fees, 2% increase contributions each year.

First, let’s focus on someone who earns the UK average salary of £35,000, or £682 a week, who pays the minimum amounts under auto-enrolment rules.

Based on our assumptions, this individual would accrue £461,000 in pension savings after 40 years. We must note that this does not include the effect of inflation over this period, which will reduce the buying power of their pot.

However, if their employer offers a matching arrangement where employer and employee each pay 7%, the pot size rockets to more than £800,000. Yet the additional net monthly cost to the employee is just £46.50.

What the table illustrates is that making the most of generous employer contributions can significantly boost your retirement pot without having to take on all the heavy lifting.

For someone earning £50,000 a year, the benefits are even more pronounced. If their employer offers a 10% matching scheme, this individual could deliver a £1 million boost to their retirement savings by paying just £166.67 a month extra than if they stick with minimum auto-enrolment levels.

I must caveat this by saying that whether employers offer more than the legal requirement is at their complete discretion. Pension offerings can be disparate between workplaces and tend to be higher in the public sector and in larger companies.

According to research by the Institute for Fiscal Studies (IFS), almost half (47%) of public sector employees received an employer pension contribution of at least 20% of salary in 2021. It’s worth bearing in mind that these are the gold-plated” DB schemes mentioned further up which may not exactly match the amount contributed by employers and employees.

Elsewhere, Office for National Statistics (ONS) data shows that the median employer pension contribution for someone in the private sector as a whole is just 3%, compared to 8% to 10% for those working in the financial services sector.

The key takeaway here is to find out the maximum amount your current employer will offer and make the most of it as soon as you can. No matter how much you’re paid, you could be missing out on some valuable free money.

The table calculates the impact over 40 years, and a big reason behind the significant pot sizes is the time your savings can benefit from the superpower that is compound returns.

UK retirement crisis looms

It’s widely accepted that auto enrolment has been a great success since its introduction in 2012. But savers who pay and receive the minimum contribution levels are unlikely to accrue a pot large enough to support them financially in later life. There is a looming retirement crisis in the UK.

According to interactive investor’s Great British Retirement Survey 2023, some 26% of respondents flagged not saving enough for retirement as their biggest financial concern. Those aged between 41 and 55 were the most worried; not hugely surprising given these years are such a key phase of the retirement savings cycle.

The Association of British Insurers (ABI) a few years ago urged the government to raise the combined auto-enrolment figure to 12% by 2031 – but currently there are no plans to reform the existing regime.

How to take control of your retirement savings

Engaging with your company pension is a crucial first step to get you thinking about your broader retirement planning needs.

To have the best chance of reaching old age with sufficient savings, it’s important to set yourself clear goals, and frequently review progress against them. It can be risky to rely solely on what your employer provides for you - however generous it may be.

A further consideration is that the chances of you remaining with one employer throughout your career is incredibly slim. On the contrary, most of us will change jobs and workplaces several times.

This means that you’re likely to rack up multiple pensions over the years, as each time you join a new employer you are enrolled on to a new scheme. Keeping track of old pensions, especially if you’ve moved home, can be tricky.

The government is currently consulting on a Pension pot for life, which could be the antidote to this problem. But with lots of practical details still to iron out, there’s no guarantee what form the policy will take, or if it will even see the light of day.

In the meantime, there are some ways to take control of your retirement savings.

If you have several pensions from previous employers scattered around, it might make sense to consolidate them into a single plan, such as the interactive investor self-invested personal pension (SIPP). There are several benefits to this approach. You could reduce costs, relieve yourself of an administrative burden, and widen your investment options.

If you would prefer that your current workplace pays into your personal savings rather than the company scheme, there’s no harm in asking. Some may be open to the idea.

An alternative option is to make frequent partial transfers from your workplace scheme to your own personal SIPP, giving you greater control over how your current workplace savings are invested.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.

Get more news and expert articles direct to your inbox