In the UK, the minimum an employer is required to pay into your pension is 3% of your annual salary. However, employer pension contributions can vary greatly depending on the pension scheme you are in, and the industry and company you work for. So, that begs the question, what is a good employer pension contribution?
What is the average employer pension contribution?
A generous employer pension contribution can reach over 20% of your annual earnings. But on average, you should expect to receive between 7% – 14% of your annual salary if you work in the private sector.
As you would expect, larger organisations tend to offer higher pension contributions as one of their main employee benefits. However, startups and small businesses are more likely to offer the mandatory 3% minimum contribution.
What is my employer’s pension contribution?
Whether you are currently employed or looking for a new job, it is important to ensure your employer’s pension contribution is aligned with your retirement goals.
Important questions to ask yourself are:
- At what age do I want to retire? The current age to receive state pension is 66, though this is increasing rapidly, and the age will likely be much higher by the time millennials and Gen Z retire.
- What kind of lifestyle do I want to lead when I retire? Do you want to live on essentials, comfortably, or luxuriously. The answer will determine the amount you need in your pension pot when you retire.
- What will my costs look like? E.g. will your mortgage be paid off, or will you still need to pay rent? Do you plan to travel and if so, how often?
Factoring in inflation and other economic factors, evidence suggests most millennials will need £1 million in their pension pots to retire comfortably at 65.
I get it. £1 million sounds astronomical. So hard to reach in fact that I was breathing into a bag for a while until I came to terms with that figure. But it is important to remember that inflation rates will increase throughout our lifetimes, and if history is anything to go by, it looks unlikely our salaries will grow to match.
That’s why it is so important to start saving for your pension early, and to also ensure your contributions match your future goals. Because let’s face it, nobody wants to work forever!
What is a good employer pension contribution?
Now, some good news. You don’t have to save that £1 million all on your own throughout your working life. That’s why we pay a small sum for our pension pots in the first place!
Whether you choose to do it yourself, or have an expert take care of it for you, your pension fund can be carefully invested in the stock market to make (you guessed it!) even more money. So let that take a little pressure off your shoulders.
But to turn that money into even more money, you’ll be in a much stronger position if you can boost your pension pot with a generous pension contribution from your employer.
So, what is a good employer pension contribution? This depends entirely on the sector you work in. Those in the private sector tend to enjoy higher wages, with less generous pensions and other benefits. Whereas those in the public sector make up for lower wages with more generous benefits. So that is certainly something to consider when choosing a new job / employer.
Ideally, you want to find an employer that pays more than the minimum 3% of your annual earnings. A good benchmark to aim for is 10% – or even higher if you can get it.
What is the minimum pension contribution an employer must pay in the UK?
If you are eligible for automatic enrollment, your employer must enroll you in the auto-enroll pension scheme. If you have been auto-enrolled into the workplace pension scheme, your employer must pay a minimum of 3% and you must pay 5%.
You are not forced to only contribute 5%, nor is your employer forced to pay 3%. Your employer’s contribution will likely be laid out in your contract, and most businesses allow you to make changes to your personal contribution at any time.
You can choose to opt-out of your pension if you wish to, but this will depend entirely on your personal circumstances. This option is likely only advisable for those who do not earn enough money each month to make ends meet, and are accruing large amounts of debt as a result.
You can use my workplace pension calculator to help you figure out how much you and your employer are paying into your workplace pension scheme each month. Using a pension calculator is an easy and effective way to improve your future financial planning.
A workplace pension calculator is also useful for helping you answer some of the questions we asked above, such as what age you will be able to afford to retire, and the lifestyle you’ll be able to afford based on your current contributions.
What your employer’s pension contribution means for your retirement
Over time, your employer’s pension contribution can make a big difference to your final pension pot.
Let’s take a look at an example, using the average UK salary of £38,600. If both you and your employer paid the minimum required amounts, your pension contributions would be as below:
| Your monthly contributions (5%) | £153.33 |
| Employer’s monthly contribution (3%) | £92 |
| Total monthly contributions | £245.33 |
This means you would be saving £245.33 towards retirement each month. That isn’t an awful lot when you consider the fact that you could be spending several decades of your life as a retiree in the future. It will also make that golden number of £1 million tough to reach!
Different pension types: employer contributions, matched contributions and final salary pensions.
Final salary pensions
Pension schemes in the UK come in all shapes and sizes, but some are a lot more common than others!
You’ve probably all heard of a final salary pension, which is probably as close to the holy grail of pensions that a person can get. A final salary pension is exactly what it sounds like, whatever your final salary is when you retire, is what you will continue to earn each year after you retire. Sounds like a pretty sweet deal to me!
For obvious reasons, final salary pensions don’t really exist anymore. At least not for those under the age of 60. They are extremely expensive to afford, especially as people are now living much longer, and put a lot of strain on generations that follow. Thanks, boomers!
Employer contribution and workplace pensions
Employer contributions are what we discussed above. These are the most common pension type, and every eligible person is auto-enrolled into this style of pension when they begin working.
As we already know, the minimum legal requirement is for an employer to pay 3% of your salary, and for you to contribute 5% of your salary into your pension. But many employers will pay more than the bare minimum.
Some employers are willing to pay much more, and this can typically range from anything up to as much as 20+%.
If your employer contributed 15% and you continued to contribute the mandatory 5%, you’d be contributing 20% of your annual earnings into your pension. And that amount certainly isn’t anything to turn your nose up at!
Using this example, let’s see how much of a difference this contribution could make to your monthly pension contributions if you were earning the average UK salary of £38,600.
| Your monthly contributions (5%) | £153.33 |
| Employer’s monthly contribution (15%) | £482.50 |
| Total monthly contributions | £635.88 |
That makes a huge difference of £390.55 per month into your final salary pot. That’s an extra £4,686.60 per year! Which added up over your working life is a lot of money. Certainly enough to make you consider switching to a more generous employer, that’s for sure!
Matched pension scheme
A matched pension scheme is one where your employer matches whatever contributions you make. Sometimes, these can be capped at a certain percentage, meaning they are willing to match your pension contribution up to a set amount each month.
As an example, if you decided to contribute 8% of your salary to your pension, your employer would match that and also contribute 8%, meaning you would have 16% of your salary going into your pension pot.
These schemes usually require more investment of your own money to really maximise the benefits, but if you can afford it, it is still a generous contribution when compared with employers who pay the legal minimum requirement.
Let’s see how a matched pension can impact your earnings compared to the legal minimum:
| Your monthly contributions (5%) | £153.33 |
| Employer’s monthly contribution (5%) | £153.33 |
| Total monthly contributions | £306.66 |
Without changing your own contributions, a matched pension means you could be saving an extra £61.33 towards your pension, without having to give up on any of your own money. That’s £735.96 extra each year, which is significantly more than the first example we looked at.
How much do you need to contribute to your pension?
As we mentioned above, the amount you need to contribute to your pension largely depends on when you want to retire and the lifestyle you want to lead after retirement.
If you want to retire earlier than the state pension age (which will likely make up a large bulk of your retirement finances) or if you want to live a life of luxury when you do, you will obviously need to invest more into your pension, and start doing it sooner.
If you have a matched contribution pension, it is a good idea to contribute as much as you can afford (don’t go into debt if you can afford it, it is likely the interest on your debt will be greater than the interest on your pension, which means your debt will grow faster than your assets).
For example, if your employer matches up to 10%, pay as much of that 10% as you can. The 10% your employer contributes is essentially free money, which I think is something we can all appreciate.
However, if your employer only contributes the minimum 3%, you may need to be a little avvier with how you contribute.
First, work out how much money you will need for retirement, and that will let you know how much you need to save each month before you get there. Use this as a rule of thumb and plan your finances accordingly.
Improving your employer pension contribution
If you’re negotiating a wage rise or a new job offer, it can be worth asking for a more favourable pension contribution if your employer is unwilling to budge on salary. You would be surprised how many employers are more open to improving employee benefits, instead of raising salaries.
If your employer still isn’t willing to budge on pension or salary, there are other things you can negotiate for, such as holiday allowance, learning and development, and more.
When negotiating, bear in mind that your employer’s pension contribution can have a huge impact on your future. If your employer only offers a 3% contribution, you will have to put 7% more of your own money into the scheme to get to the same point as someone else whose employer offers 10%! For that reason alone, it’s worth asking the question.
Alternatives to workplace pensions
While it is always worth investing in your workplace pension (manly for the “free” money from your employer, and for the tax break you receive on your contributions) if your employer is less than generous with their contributions, there are steps you can take beyond your employee pension.
Lifetime ISA
For those of you who don’t know, a Lifetime ISA is a tax free savings pot that can be used to save for either your first home or your retirement.
With this ISA, you can save up to £4k a year, tax free. And the best part? The Government will match 25% of your contribution each tax year – meaning you could get up to £1k free each year. Kerching!
When you open your LISA, you will have the option to open a Stocks and Shares ISA or a Cash ISA. As with all stocks and shares ISAs, your capital is at risk. This means your money can go down as well as up, so make sure you consider these risks before opening. For those of you who are less risk averse, it can be a great way to get around the current slump in interest rates.
But before you rush to the bank and open your LISA, beware! Any money invested into a Lifetime ISA can only be used to buy your first home or for your retirement. If you want to withdraw your money for any other reason, you will lose 100% of the Government’s cash bonus plus £6 for every £100 you invested. So if you need to keep your cash flexible, this may not be the best option for you.
SIPP
This is a self-invested personal pension you can set up yourself. This type of pension doesn’t offer the same tax breaks as your employer’s pension, but can give you more control over how your money is invested – which could lead to bigger returns come retirement.
Investing
This technically isn’t a pension as such, but investing your money in the stock market alongside your pension contributions will make a huge difference by the time you come to retire.
By investing a percentage of your income each month, you could end up with a substantial pot by the time you come to retire.
There are plenty of ways to invest, whether you want to do it yourself, or have a broker do it for you. It is important you weigh up the risks before you choose to invest how and where you want to. After all, your capital is at risk.
Had a lot of jobs? You may want to consider combining your pensions
If you’re anything like me, you will have job hopped (a lot) over the years. Until recently, I had over 5 separate pension pots, which became expensive (fees are the worst!) and difficult to manage.
To make my life easier, I decided to consolidate them all into my current workplace pension scheme. This process is extremely simple, and can be done by filling out a form with your current pension provider.
I did this with Scottish Widows, and the form took only 5 minutes to complete. They took care of the rest, and now all my pension pots are in one place.
Final thoughts on saving for retirement and employer pension contributions
Saving for the future is one of the biggest challenges of our working lives. We may not know what lies ahead, but ensuring we have enough money to live comfortably in the future will help prepare us for any unexpected life events that negatively impact our finances.
It could be that you or your partner become too sick to work, or that your circumstances change unexpectedly. But having enough savings to cover you in the future will remove one major stress. Because let’s face it, who needs money trouble in their 60s?
A high employer pension contribution is one of the easiest ways to get you to the golden ticket amount of £1 million. And it means you don’t have to make bigger sacrifices in the short term to get there.
Many will have to invest heavily in the stock market, property, or other pension pots throughout their lives to reach this amount. But it is much better when someone else is doing it for you.
So, what are you waiting for? Find out how much your employer contributes to your pension, and the amount doesn’t align with your life goals, it could be time to start negotiating, or even move on.