How to double your pension at the press of a button

When it comes to thinking about how best to tuck away money for your golden years, joining your workplace pension scheme should be a no-brainer.

Your savings can get a much-needed boost if your employer matches your contributions, and – if you start saving early – can make a significant impact on the amount you end up with in retirement.

Almost 11 million people pay into a workplace pension via auto-enrolment. 

The scheme was introduced 10 years ago, and means employees over the age of 22 who earn more than £10,000 a year are automatically enrolled into their company pension scheme, where they pay in a minimum of 5pc of their qualifying earnings, and their employer contributes at least 3pc.

Some employers choose to pay more as standard, and some will be willing to match whatever you pay in.

Qualifying earnings refer to what you earn between £6,240 and £50,270 – however some employers will calculate your contributions based on the whole of your earnings.

Becky O’Connor of PensionBee, said: “Your workplace pension may be more generous than you realise, and there’s a chance you aren’t taking advantage of extra ‘free money’ from your employer.”

Here, Telegraph Money crunches the numbers to show how increasing contributions while you’re working can make a massive difference in retirement. 

The benefits of workplace pensions

There are two big benefits to workplace pension saving above other kinds of saving: tax relief and employer contributions.

When you pay into a pension, HM Revenue and Customs pays an extra 20pc – which is factored in as part of your minimum 5pc contribution. This covers basic-rate taxpayers; higher or additional-rate taxpayers can claim extra tax relief via a tax return. 

This means basic-rate tax relief turns an £80 contribution from you into £100 in your pension pot. 

Assuming all reliefs are claimed, higher-rate tax relief turns a £60 contribution from you into £100. To get £100 in your pension as an additional-rate taxpayer, you’d only need to make a contribution of £55.

So what happens when you add employer contributions at the minimum 3pc rate?

Ms O’Connor said: “The basic-rate taxpayer then gets a total of £160 going into their pension at a cost to them of £80, and the higher and additional-rate taxpayers get the same amount, but for a lower cost.”

Some workplace schemes are more generous

While many employers stick with the auto-enrolment minimums, it’s worth noting that some offer higher contributions.

So-called ‘double-matching’ is a relatively common employer perk, according to PensionBee. 

This involves an employer doubling whatever amount the employer puts in (including their tax relief), up to whichever maximum they choose. The most generous usually go up to a maximum of 20-25pc.

The tables below shows how double-matching increased pension contributions can impact how much goes into your pension over a year.

Make the most of employer matches

Over time, extra contributions can really add up.

Helen Morrissey of Hargreaves Lansdown, said: “An employer match – where your employer contributes more when you do – is a great way of making the very most of your pension and benefiting from free money.”

Analysis by Hargreaves Lansdown shows that a 22-year-old with a £25,000 salary who retires at 67 and contributes at auto-enrolment minimums throughout their working life could hit retirement with a pension worth around £150,000. This assumes 5pc annual investment growth, and a flat salary.

But if your employer were willing to match your 5pc contribution, the amount would grow to around £188,000.

Further analysis shows if the employer matched a 6pc contribution (giving 12pc overall), you could see a pension pot worth around £225,000 at retirement. If they matched up to 8pc, the pension could swell further to around £300,000. 

In times like these, with household budgets feeling stretched, it can be difficult to find spare money to squirrel into a pension.

But if you are able to tuck a bit more away, it’s well worth checking if your employer offers such an arrangement.

Ms Morrissey said: “If they do, you can end up with a lot of extra pension for not a lot of extra money. That said, if budgets are too tight, and you’ve found out your employer does offer [matched contributions], make a note, and make the most of this extra cash as soon as you can.”

Do all you can to avoid opting out 

If you are facing serious financial difficulties, you may be tempted to opt out of your workplace pension altogether and pocket your pension contributions now instead.

But you should only do this as a very last resort.

Opting out, even for only a short time, can have a lasting impact on your pension savings. It makes sense to prioritise pension saving even when finances are under strain.

Jonathan Watts-Lay, of retirement specialist Wealth at work, said: “It is understandable people may look at their pension contributions as a way of cutting back on their monthly costs. While this is likely to mean you make relatively small cost savings each month, the impact on your retirement savings in later life will be dramatic, due to lost employer contributions and tax relief.”

If you are considering it, aim to make the smallest possible reduction in pension contributions.

Mr Watts-Lay added: “Saving money is a habit, and once you stop it is very difficult to start up again. Before reducing or stopping contributions, ensure you’ve been through all your outgoings to find other ways to save money.”

This might involve cancelling any unused subscriptions, shopping around for better deals on your car and home insurance, broadband and mobile phone, and switching to cheaper unbranded products on your regular shop.

If you are still forced to stop or reduce your pension contributions, it’s a good idea to plan how long you’ll do it for, and be ready to re-start as soon as you possibly can.

What about self-employed workers? 

While employer matching offers a real boost to eligible employees, there are plenty of individuals not covered by auto-enrolment, including the self-employed.

Tom Selby from AJ Bell, said: “Auto-enrolment has been successful in dramatically increasing the number of people saving something for retirement, but now is not the time for the Government to sit back and admire its achievement. 

“Retirement saving solutions need to be found for the millions of self-employed workers. 

“There are ideas of how to do this, including potentially using the tax system to effectively auto-enrol the self-employed, although this approach would likely involve significant costs to the Government.”

As a self-employed worker, you may look at other options to fund your retirement, such as a Lifetime Isa or property, but a pension is generally the best vehicle for retirement savings due to the tax savings on offer, as self-employed workers still receive government tax relief on pension contributions.

Think about paying into a personal pension, a self-invested personal pension (SIPP), or even the Government’s National Employment Savings Trust (Nest).

If you’re not sure what suits you best, seek independent advice.