Wanted to get some other’s opinions on whether it’s worth increasing UK pension contributions.
Currently my employer only offers the minimum allowed.
3% employer, 5% employee, 8% combined contribution.
I was wondering if it would be worth increasing my contribution to this?
I’m in my early 20s, so I thought I could build the increased contribution into my budget so I wouldn’t really notice the difference if I were to raise it.
Unfortunately the employer contribution would stay the same at 3%, but if I raised my contribution to 10%, that would raise the combined to 13%.
Has anyone else increased their pension contribution above what is needed to get the max employer contribution?
Look at point 3 in particular on this page. It gives you a good rule of thumb
This may also help you
In a nutshell, assuming you don’t have any other pensions and you’re not in significant debt (excluding mortgages and student loans), a small increase is probably not a bad idea! You should double check how to decrease your contributions in future too, in case your circumstances change.
I think like most money decisions, there’s no absolute answer. The question you need to ask is whether it’s better to put that extra 3% into your pension or to do whatever else you might do, i.e. the real question is “or what?”
For example, if you’re a 20% tax payer your 3% contribution is grossed up so that you get an extra 25% free - a pretty good return for doing nothing. However, if you’re still a 20% tax payer when you come to draw your pension you’ll pay 15% of whatever that’s worth in income tax, which means you really only end up with around 6% “free”.
That’s better than nothing, but not necessarily enough to justify tying up money you’ll wish you had access to over the next 30 years. However the maths changes if you’re a 40% tax payer now (better) or expect to be a 40% tax payer when you retire (worse).
The most obvious “or what” is to put the money into an ISA. You get no “free” tax back when you put money in, but you’ll pay no tax when you draw it, and you can draw it whenever you like. If you’re a 20% tax payer now and will be a 40% tax payer when you draw the money down then I think you might “make” more (assuming you invest it the same way) than you would in a pension.
Another consideration is the investment options. If you want to buy relatively higher risk investments then you may find that only some pension schemes and ISA plans willl allow them. If you employer’s pension scheme won’t let you invest the money the way you want to then you may get a lower investment return - over 30 years that will make quite a difference.
And yet another consideration is the utility: your money may grow over time, but you can’t “enjoy” it while it’s in your pension. There are other investment options (some of which will also grow - but perhaps with more risk) which you can enjoy while they grow (classic cars, art, jewelry, your home, etc.) Do you want to spend the next 30 years watching your pension balance grow or enjoying that carefully selected artwork?
Of course, the right answer is very dependent on your personal circumstances and choices - unless you know the answers to many questions about your future, you’re guessing where to put money that perhaps you’ll spend on food (putting on weight) and on a gym membership (to lose it) or perhaps you’ll just put it under your mattress for the next 30 years.
If it’s any consolation to know what others do, for comparison I can tell you that I’ve always put into my pension the amount that maximised contributions from my employer. Some of my employers have been willing to match my contributions (up to a point) which has been just too much free money to pass up.
I’ve never topped my pension up beyond that, for 3 reasons: too much uncertainty around my retirement circumstances, too much uncertainty about whether I’ll need the money before I retire, and too little flexibility to make the kind of higher risk/return investments that I felt this long timescale warranted.
I’ve always felt that it’s important to save for retirement, but not in a way that sacrifices my pre-retirement happiness by tying those savings up (I’ve never been confident that I’ll even make it to retirement!) - so I’ve always aimed to put as much money into my ISA as I can spare. Knowing that I can always draw it if I need it, the friction of actually doing so has worked: so far I never have.
Within the ISA I’ve tried to mitigate risk by diversifying: buying multiple funds that invest in multiple assets from multiple companies. For their simplicity I have tended to prefer listed investment trusts. And because I’m saving for the long term, I’ve made relatively higher risk/return choices like smaller companies, technology, and emerging markets.
What about a SIPP instead? You can do much the same. If the OP is sure their employer will never up the company contribution, it might also be something to consider
They do all the things a pension does, so you can get government contributions up to the pension limit, and you can invest it in (almost) anything - they’re at least as flexible as a stocks and shares ISA.
