What we should really be asking employers for is the lowdown on the company pension. The type of company you work for might have a bearing on the generosity of your scheme.
When you’re offered a new job, your first question is always likely to be ‘what’s the salary?’ You might also be eager to hear about the company’s rewards and benefits package: is private medical insurance included, can you work from home or bring your dog into the office?
But perhaps what we should really be asking potential new employers for is the lowdown on the company pension.
All employers now have to offer a workplace pension – but there are huge differences in the actual offers on the table, with some employers offering the legal minimum but others going a whole lot further.
The deal you get could make a huge difference to your standard of living when you eventually retire, especially if it’s a job you end up staying in for years.
The minimum you can currently pay into a workplace pension is 8% of your qualifying earnings, according to auto-enrolment rules. This is made up of a minimum 3% from your employer with 5% paid by yourself and deducted from your salary. The only way you can pay less than 5% is if your employer pays more than 3%.
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The catch is that qualifying earnings doesn’t mean all your earnings. Currently, qualifying earnings are the range between a lower limit of £6,240 and an upper limit of £50,270. So, if you’re only getting the legal minimum, the maximum you’ll be paying into your pension is 8% of £44,030, whether you’re earning £60,000, £70,000 or £100,000.
Going the extra mile
However, many employers will offer more. This could start with simply basing contributions on all of your basic salary, rather than limiting them to your qualifying earnings.
Other employers will pay more in on your behalf as well. Often increased contributions work on a matched basis, meaning the more you pay in, the more they will pay too.
Some employers will even double match your pension contributions. That would mean if you paid in 5%, your employer would pay in 10%, giving you a total contribution worth 15% of your basic salary.
Research, however, has shown that we don’t always value the generosity of our workplace pensions. According to an Octopus Money survey of FTSE 50 firm employees, there was no difference in satisfaction between people who got enhanced matching on their contributions than those who didn’t.
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But while you might not be paying much attention to your pension deal, these ‘minor details’ could have a huge impact on your retirement wealth.
What the differences mean for your pension
Take an individual earning £80,000 a year.
If they got the legal minimum of 8% of their qualifying earnings, a total of £3,522 would be paid into their pension each year. But, if their contribution was based on their full basic salary, they’d be putting away £6,400 each year.
Stepping up to a generous employer who double matches employee contributions, our £80,000 earner could get a total contribution worth 15% of their salary and get £12,000 paid into their pension each year. Even better, it wouldn’t cost them a penny more than the previous 8% example as the additional contributions are all coming from the employer. During your working life, that difference plus the power of compounding, can add up to significant sums of money and seriously affect the quality of your retirement.
Big v small business
The type of company you work for might have a bearing on the generosity of your scheme. According to a survey in 2021, by consultants Gallagher, just under nine in 10 firms offered more than the statutory minimum.
Pharmaceutical firms paid the most – averaging 8.3% - ahead of financial services firms where the average contribution was 6%. Construction companies were at the bottom of the table, paying an average of 3% - the current legal minimum.
But it might not just be the industry you’re in. The size of the business you work for might have an impact too.
It’s often said that larger companies will offer better pensions than smaller companies. While this is a generalisation – there will always be some smaller firms with a better package than some bigger companies – it is fair to say that, on the whole, the larger a business becomes, the bigger its HR function and the more attention will be paid to employee benefits, including the workplace pension.
The difference is likely to be the most noticeable if you’re working for a very small or start-up company. With a focus on fast growth, they might be paying their talent impressive salaries, but with a need to keep costs down, pension provision can easily become a tick box exercise, with nothing offered over and above the amounts required by legislation.
Getting your pension sorted
Pensions are an important part of your remuneration package, whether or not you acknowledge or value that fact. Your employer’s contribution is effectively extra pay – helping to pay you a ‘salary’ when you’re no longer working.
Of course it doesn’t make sense for pension provision to totally drive your choice of role. If your desire is to be a big part of a small, entrepreneurial business, there’s no sense in ditching it favour of a job in a bigger, more corporate business, just because it offers a better pension.
The important thing is to know where you stand and work out whether you’ll be saving enough for a comfortable retirement.
If you’re only getting the legal minimum and paying contributions based on your qualifying earnings – you’ll definitely need to make additional contributions.
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It’s also a good idea to compare the current package with what you’ve had in previous jobs. If a new job means you’ll be earning more but saving less, you’ll need to increase your contributions to keep your pension on track.
You might also want to ask if your employer can make your contributions via salary sacrifice. This is where you agree to a lower salary with your employer paying that money into your pension instead, reducing the amount of tax and National Insurance you pay.
You don’t have to increase contributions to your workplace pension though. You can choose to channel additional contributions into your own personal pension such as an online SIPP.
This could be particularly helpful if you have a collection of old workplace schemes that you are no longer paying into. Consolidating them into a SIPP can lower your costs and make your retirement savings easier to manage.
The important thing is to run your new pot alongside your workplace pension. Opt-out of your workplace pension in favour of your new SIPP and you’ll lose the benefit of your employer contributions.
Questions to ask about a new workplace pension
- How much will you pay into my pension?
- Are contributions based on my basic salary or just my qualifying earnings?
- If I pay more into my pension will you match my contributions?
- Can I use salary sacrifice to make my contributions more tax effective?
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