Miserly employer pension contributions see average UK worker sacrifice £100,000 of lifetime salary to boost retirement pot

11 September 2023

Quilter urges people to check their employer’s pension generosity this Pension Awareness Week

New analysis from wealth manager, Quilter, has found that miserly minimum employer pension contributions of just 3% could leave the average UK worker £100,000 worse off during their working lifetime compared to someone with a good 8% non-contributory employer pension scheme.

With higher everyday costs and continued interest rate rises putting further pressure on household finances, we have seen an increased focus on earnings. However, this new analysis shows there is far more to your monthly pay slip than just what you take home each month.

Those who are auto-enrolled into their employer’s pension scheme will likely be used to seeing a monthly pension contribution listed, but not all will understand how that figure is calculated and the difference an employer’s pension generosity can make on both a monthly basis as well as on your quality of life in retirement.

In its analysis, Quilter compared three different types of pensions. All are set at an 8% contribution rate, but differ significantly in the way this is applied:

Minimum: The pension contribution is calculated based on qualifying earnings under auto-enrolment and offers the minimum auto-enrolment pension contribution of 8% of qualifying earnings – any pay between £6,240 and £50,270. Of this, 5% is deducted from the employee (including tax relief), and 3% comes from an employer contribution.

Moderate: The pension contribution is calculated based on qualifying earnings, with 3% deducted from the employee, and 5% comes from an employer contribution.

Good: The pension contribution is based on a non-contributory arrangement. The employer makes the full 8% pension contribution based on qualifying earnings with no deduction from salary.

The simple illustration below shows a 22-year-old employee earning the average UK wage of £34,476* receiving only the minimum employer pension contribution of 3% would have to sacrifice £100,000 of their salary over the course of their career in order to achieve the same pension pot (after growth) as someone with a good 8% non-contributory scheme who would pay nothing**.

What’s more, if the employee with a ‘good’ employer contribution opted to make an additional 5% pension contribution, their total pension pot could reach £776,547**.

On an annual basis a good, non-contributory pension scheme can significantly boost your overall remuneration package by over £1,400 more when compared to an employer scheme offering only the minimum requirement, freeing up a significant amount of money during your working life.

Given the current cost-of-living crisis, your employer’s pension generosity could therefore make a considerable difference to your quality of life, both during your working life and in retirement.

Jon Greer, head of retirement policy at Quilter, says:

“We tend to focus on our salary and what we take home each month, but this doesn’t tell the full story. There is a huge difference between an employer paying the minimum pension contribution compared to one with a more generous scheme. Not only can this make a significant difference to your total remuneration package over the course of a year, and in the longer term your working life, but it can also have a real impact on your quality of life in retirement too.

“Arguments over pay have consistently made the headlines in the last couple of years as workers fought for higher increases to help ease the burden of the cost-of-living crisis. While this is important, it is also vital not to forget your pension pot. If a young person says to me they are going for a job interview, I always recommend they check what the employer will pay into their pension as it is so valuable in the longer term, and it is rarely something they have considered focusing on. Some industries tend to be more generous when it comes to pension contributions than others. For example, roles within energy supply and financial services tend to have better than average pensions, so it is well worth exploring what is on offer. It pays to look at the small print of your total reward package, not only pension contributions but other elements such as healthcare provisions and insurance too.

“Our calculations based on the PLSA’s Retirement Living Standards research found that for a single person to achieve a comfortable lifestyle in retirement, they must have a pension pot of £600,000***, while someone looking to achieve a moderate retirement lifestyle would need to build a pension pot of approximately £280,000. While these figures are only a guide, it is worth noting that you need to build up a relatively significant pension pot to achieve even a moderate lifestyle.

“To ensure you are able to get the most out of retirement, it is important to check exactly what is being contributed towards your pension – both from your employer as well as your own contributions. A recent report from the IFS found that over half (53%) of private sector employees contributing to a workplace pension have total contributions of less than 8% of total earnings. It is important to remember that your pension contributions will likely be based on qualifying earnings as opposed to your full salary, so the total contribution may be less than you might have initially thought.

“When considering your pension savings and your goals for retirement, seeking professional financial advice can be highly beneficial as a financial planner will be able to help you evaluate your projected retirement income and illustrate just how long your money will last using cashflow modelling. It can be tempting to just focus on the money that is in your pocket now, and while that is important, it is equally important to consider your quality of life in retirement too. If you are in yours 40s, 50s, or 60s, you can take a free mid-life MOT using the government’s online planner which can help you take stock of your financial position and better prepare for retirement.”

*Average UK salary based on ONS average weekly earnings in Great Britain (August 2023) data

**Calculations assume savings period from 22-67 years of age, starting with an average UK salary of £34,476 with an average 2% annual wage increase, a 5% growth rate and 1% fund, advice and service expenses.

***Calculations assume an escalating income of 3% and an annuity rate of 5.5% based on someone who is aged 66 (which is the current age to receive state pension). All numbers rounded to the nearest thousand.