The minimum pension contribution may not be enough – 3 reasons to increase contributions.

You may well be a member of a workplace pension scheme through your employment. This means that pension contributions are deducted from your pay and added to your workplace pension. However, the minimum pension contribution may not be enough to secure the retirement you want. If this is the case, the sooner you identify a gap, the more options you have. Read on for further information.

The current minimum pension contribution is 8% of your pensionable earnings, consisting of 5% deducted from your salary and 3% from your employer.

In many cases, the minimum contribution levels will not accumulate enough pension wealth to secure the lifestyle you want. It’s important to understand what income you want in retirement and the steps you can take to achieve this. It’s even more important to balance these against your current capabilities.

Just 27% saving the minimum pension contribution think they’re saving enough

The Pension and Lifetime Savings Association (PLSA) asked pension savers whether they think they’re saving enough for retirement.

Around three-quarters said they were; however, this fell significantly when they were asked about the retirement lifestyle they want to achieve.

41% of people said they wanted a “moderate” lifestyle, described as covering their basic needs and allowing them to do some of the things they would like in retirement. Just 27% believe they’re saving enough to reach this goal.

In addition, 33% said they were saving for a “comfortable” retirement that would allow them to do most of the things they would like. Only 14% of people with this goal feel they’re taking the right financial steps now.

Nigel Peaple, director of policy and advocacy at the PLSA, said: “We have long argued that current contribution levels are not likely to give people the level of income they expect or need.”

The organisation is calling on the government to gradually increase minimum pension contribution levels for both employers and employees.

Increasing your pension contributions now could afford you a more comfortable retirement and mean you’re financially secure in your later years. If you’re not sure how your pension contributions will add up over your working life and the lifestyle it will afford you, we can help you create an effective retirement plan that will give you confidence.

3 more reasons to increase your pension contribution

1. You’ll receive more tax relief

When you contribute to your pension, you can receive tax relief. This means that some money adds to your retirement savings rather than going towards tax. Essentially, it gives your savings a boost and the more you contribute, the more you benefit.

Remember, if you’re a higher- or additional-rate taxpayer, you will need to complete a self-assessment tax form to claim the full tax relief to which you’re entitled.

There is a limit on how much you can add to your pension while still benefiting from tax relief known as the “Annual Allowance”. For most people, this is £40,000 or 100% of their annual income, whichever is lower. If you’re a higher earner or have already taken an income from your pension, your allowance may be lower. Please contact us if you’re not sure how much your Annual Allowance is.

2. The money is usually invested

Usually, the money held in your pension is invested.

As you’ll typically be saving over decades, this provides you with an opportunity for your contributions, along with employer contributions and tax relief, to grow over the long term. It means your pension savings could grow at a faster pace and create a more comfortable retirement.

If you want to invest for the long term, doing so through a pension can be tax-efficient.

Keep in mind that your pension usually won’t be accessible until the age of 55, rising to 57 in 2028, and that investment returns cannot be guaranteed.

3. You could pay less tax through salary sacrifice

If you want to increase your pension contributions, it’s worth talking to your employer to see if they offer a salary sacrifice scheme. It could mean you have more for retirement while reducing your tax liability now.

As part of a salary sacrifice scheme, you, as the employee, would agree to reduce your earnings, while your employer would agree to pay the amount your salary has reduced by into your pension. As your income will be lower, you may be liable for less Income Tax while increasing your pension.

Again, keep in mind that you won’t be able to access your pension savings until you reach pension age.

Can you afford to increase your pension contribution?

The most vital question you should ask yourself if you are considering increasing your pension contribution is “can I afford this?”. If you don’t have the financial capacity to increase your contributions, doing so could cause serious issues. Whilst increasing contributions can be a great idea, it has to work for you and your personal situation.

Contact us to understand how you can get more out of your pension

If you’re not sure if you’re saving enough for retirement or want to understand how you can make your contributions add up, please contact us. We can take you through all the information as well as helping you review your potential requirements for your retirement against your current situation.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.