How to increase pension contributions (and why)

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Updated on
October 8, 2022

In a nutshell

It’s a great idea to pay more into your pension so you can have a more comfortable retirement. The best way to do this is to open a personal pension (it’s super easy to do). You might also be lucky enough to have an employer match increased contributions too (more free money).

Nutty

If you have a pension through work, known as a workplace pension, it’s not just you who has to contribute. Your employer legally has to boost your savings for retirement by paying into your pension pot themselves too. Kerching!

But what happens if you want to save more for retirement? How do you increase your retirement income? Is increasing your pension contributions a good idea? Well, it’s always a good idea to put aside as much as you can afford for retirement. But depending on your agreement with your employer, you might be better off starting your own personal pension instead of paying more into your workplace one. It’s super easy!

Let’s run through everything you need to know about that, and the best options for you.

Increasing pension contributions

Why increase pension contributions?

We know, we know, nobody likes paying more than they have to. But adding more money into your pension is one area where it really pays off. For one, the more you pay into your pension, the more money you’ll have to live off when you retire. And there are tax benefits that come with putting money into a pension too (we’ll tell you all about those in a bit!). 

One BIG reason for increasing pension contributions is to do with your employer’s contributions.

If you’re employed by a company, the chances are you have a workplace pension – that’s one that’s set up for you by your employer. It’s part of a scheme called auto-enrolment, which means unless you opt out, your employer normally has to open a pension for you.

If you have a workplace pension, you have to contribute at least 5% of your earnings to your pension every month. That might sound like a lot, but the more you contribute to your pension, the more financially secure you’ll be in retirement. So, you’ll thank yourself later!

This is taken automatically from your salary, and called salary sacrifice. It also reduces the amount you pay in Income Tax and National Insurance too.

However, you’re not the only one contributing to your pension pot. Your employer also has to contribute at least 3% of your income from their own pocket. Get in!

Workplace pension

The key here is ‘at least.’ While all employers have to contribute 3%, some very nice employers will choose to contribute more.

It normally comes in the form of matching your contributions. In other words, if you pay 5% into your pension pot each month, your employer will pay 5% too. But if you pay 7% into your pension pot each month, your employer will also contribute 7%.

If you’re one of the lucky employees who have an employer like this, increasing your pension contributions is pretty much a no-brainer. The more money you pay into your pension pot, the more free money you get from your employer’s pocket!

Increasing pension contributions to reduce tax

Another great benefit of increasing your pension contributions is to also reduce your tax bill. Saving into a pension is intended to be completely tax-free, as the government wants you to have a nice big pension of your own when you retire (as the State Pension isn’t that big. At the moment it’s just £185.15 per week).

That means any money you pay into your workplace pension, directly from your salary, will be taken before you pay tax, which reduces the amount left that you have to pay Income Tax and National Insurance. Pretty great right?

This is a great way to reduce tax if you get paid a bonus (plus reduce National Insurance contributions). Learn more about that with our guide to tax on bonuses.

And if you have a personal pension – which is another type of private pension, just like a workplace pension (so one in your name, and not the State Pension) – the government will actually refund any tax you’ve paid on your contributions straight back into your pension pot.

They’re different to workplace pensions, as you open and manage them, rather than your employer, and you add money into them after you’ve been paid (so have already paid tax).

This tax refund (called tax relief) comes in the form of a 25% bonus on anything you put in (which works out as refunding the basic rate of 20% tax. And if you’re a higher rate or additional rate taxpayer, you can get further tax relief and claim back some of the tax at these rates too (40% and 45%). All you need to do is add it to your Self-Assessment tax return.

Pretty great right? We’ll cover personal pensions in a bit more detail below.

By the way, if you’re self-employed, we strongly recommend opening a personal pension as soon as you can! They’re the only way you’ll be able to save for retirement. Here’s the best personal pensions if you’re keen to get started.

Worried about not getting the State Pension?

In order to be eligible for the State Pension, which you’ll get when you reach ‘State Pension age’ which is currently 66, but set to rise to 68 in the future, you’ll have to have made at least 10 years worth of National Insurance contributions. However to get the full State Pension, you’ll need to have paid 35 years worth of National Insurance.

Your National Insurance record holds information on all of your payments. And you can check this on the GOV.UK website.

If you’re worried about not having paid enough, you can make voluntary National Insurance contributions to cover the last 6 years. You can also defer taking it too. Learn more about how to top up your State Pension. You can also speak to MoneyHelper (previously called the Money Advice Service – it’s free guidance from the government).

Should I increase my pension contributions?

Now before we go any further, you should ask yourself if you should increase your pension contributions. Often the answer is a big yes! There’s so many benefits to paying more into your pension – and the earlier in life you do it, the bigger these benefits.

If you’ve got spare cash each month, and you know you won’t need the money in the short-term. We recommend paying a bit extra into your pension. 

Think of it like a savings account, except supercharged! You’ll not only get the money back later in life, but it would have increased by a lot. It’s far better than leaving it as cash in your bank account or a savings account earning a little bit of interest.

Not only is all the money you add into a pension tax -free, but when you save within a pension, it’s also tax-free when it grows. So you won’t pay any Capital Gains Tax, Income Tax or Dividend Tax when your money grows (similar to a Stocks and Shares ISA). Which means your money will grow much faster than saving outside of a pension.

However, your money will be locked away until you are at least 55 (57 from 2028), so you need to be sure you won’t need the money until then. And ideally much later, as it’s intended to be your income when you retire.

So if you can pay more in each month and you won’t miss it, you should. If you can’t at the moment, don’t stress. Paying the bills and enjoying time with your family should come first.

Can I increase my pension contribution?

Then there’s the question, can you actually increase your pension contributions?

Firstly, not all employers are lovely enough to match your contributions. Most employers will only contribute the minimum 3% to your pension, which means you won’t get all that lovely free money from your employer by making additional voluntary contributions. Doh!

Similarly, most workplaces that do match their employees’ contributions will put a cap on it. For example, they might say that the maximum they’re willing to contribute to your pension is 12%. If that’s the case, then upping your contributions beyond this won’t unlock more free money either!

Don’t get us wrong, it’s still a good idea to pay more into a pension if you can. But instead of increasing contributions to your workplace pension scheme, in this case, we’d recommend starting a personal pension instead – that’s a pension that you set up yourself.

We love personal pensions because they give you more control over saving for your retirement. Workplace pensions are great and it’s super convenient letting your employer set one up for you. But your employer is unlikely to spend time hunting for the best-performing pension providers with the cheapest fees for you (pension providers are the companies that give out pensions).

With a personal pension, you can find the best pension provider for you, which normally means you’ll end up with someone who can grow your money much faster. Plus, you’ll have the flexibility to save how you want. Unlike a workplace pension, you won’t have to invest a set amount of money each month – you can contribute as much or as little as you like, even making small one-off payments if that’s what’s best for your bank balance!

So, increasing your workplace pension contributions is a great shout while you’re unlocking more free money from your employer. But if you have additional income you want to add to a pension and you’ve maxed out your employer’s contributions, you’re much better off starting a personal pension alongside your workplace one. That way, you get the best of both worlds!

Benefits of increasing pension contributions

It’s always a good idea to put as much money into your pension as you can comfortably manage – no matter whether that’s through increased pension contributions or by setting up a new personal pension. Here are the main benefits of upping the amount you put into those pension pots.

1. Tide yourself over later on in life

You know that rule that says you have to contribute at least 5% of your income to your workplace pension each month? Well, that doesn’t take into account your personal circumstances at all!

Let’s say you start a pension at 40 and you want to retire at 60. That gives you 20 years to save for retirement. On the other hand, if you start a pension at 20 and you want to retire at 60, you’ll have 40 years to save for retirement! So, if you start a pension later, you’ll probably need to put aside a bit more each month in order to save the same amount before you retire.

Similarly, the 5% rule doesn’t take into account your plans for retirement. Some people might not mind cutting back on luxuries in their sunset years, but if you want to live your retirement years to the max (cruises around the Caribbean anyone?!) then you might want to squirrel away a bit more.

Ultimately, the more money you manage to put aside for your retirement, the more comfortably you’ll be able to live when you’re old and grey. As a general rule of thumb, you’re normally advised to save enough so that you have 50% to 66% of your current salary to live off each year when you retire. If you earn £30,000 per year now, that would mean saving enough to pay yourself between £15,000 and £20,000 per year in retirement.

That said, we know that saving up that much can be daunting – especially if you have lots of outgoings, like kids to provide for. Ultimately, the best advice we can give you is to put aside as much as you can manage without overstretching yourself now – you can always up your contributions later down the line. It’s all about working out what’s best for you.

2. Tax benefits

Perhaps our favourite thing about pensions is this amazing thing called tax relief. 

Tax relief refers to the fact that the government doesn’t charge you tax on any income you put into your pension. Happy days! This is all because they want to encourage you to save up for retirement (so they don’t have to support you when you’re older!).

How you get this lovely tax relief is different for workplace pensions and personal pensions.

  • Workplace pensions. The government won’t take any tax off the money you’re planning on putting in your workplace pension. This is because your employer will tell them how much you’re going to put into your pension in advance.
Workplace pension tax relief
  • Personal pensions. Your income will be taxed as usual as the government won’t know how much money you’re planning on putting in your pension in advance. However, once you put money into your pension, any tax you’ve overpaid will be refunded straight into your pension pot.
Private pension tax relief

Either way, you’re basically getting the same thing. With a workplace pension, tax relief is a great way of reducing your tax bill. And if you have a personal pension, that nice government bonus will refund you the tax you’ve paid.

If you have a personal pension and you’re a basic-rate taxpayer (meaning you earn less than £50,270 per year), you’ll get 20% tax relief. That means if you pay £80 into your pension pot, the government will add in a £20 bonus to turn it into £100. Kerching!

But if you’re a higher-rate taxpayer, you’ll get an even bigger bonus to make up for the fact that you pay more tax. You can get 40% tax relief on any income you’ve paid 40% tax on. Or, if you’re an additional rate taxpayer (someone who pays 45% tax), you can even get some tax relief at 45%. Nice!

3. Compound interest

We bet you’ve heard the phrase ‘every little helps.’ And with pensions, it’s absolutely true. Small contributions to your pension pot really can add up over time. This is all thanks to something called ‘compound interest,’ or ‘compounding interest.’

When you leave your money sitting in a savings account like a pension, it will grow as the investments increase in value or you earn interest (interest is a payment you can get for leaving your money sitting in savings accounts). Compound interest refers to the fact that this extra money you’ve made on your savings will also grow, so your money is making more money.

Mind boggled? Don’t worry, we’ll break it all down here.

Imagine you start a pension right now and you invest £1,000 this year. Let’s say you make a 5% return (that’s £50). That means that in just one year, your £1,000 has turned into £1,050 without you doing anything at all. 

Now imagine you make a 5% return in your second year as well. That’s 5% of £1,050, which means altogether you now have £1,102.50 (your money has increased by £52.50 instead of just £50 like it did the previous year). 

Your money will keep growing like this every year, on top of all the money you add to your pension yourself. It might not look like a big increase to start with, but if your money keeps growing like this for 25 years and you add £300 per month too, you’ll end up with £184,134.20! So, adding small amounts to your pension regularly really can make a difference.

Compound interest

How to increase pension contributions

Increasing your pension contributions can unlock more contributions from your employer (if they agree to match your contributions!) and help you save more for your sunset years. But how do you do it?

Well, you’ll be pleased to hear that it couldn’t be easier. And we mean it! All you have to do is tell your employer what percentage of your earnings you want to contribute to your pension each month.

Your employer will then sort everything out for you, arranging for your additional voluntary contributions to be collected from your monthly earnings and making sure that the taxman reduces your tax bill accordingly. It’s as easy as that!

How to start a personal pension

If your employer won’t match your pension contributions, or you’ve already maxed out your employer’s contributions, you’re best off starting your own personal pension.

Remember, by starting a personal pension rather than increasing your workplace pension contributions, you get your pick of pension providers. That means you’ll be able to choose a provider with low fees and a great track record of making money grow. And you’ll get control over your savings too!

Here’s how to start a personal pension.

How to start a private pension

1. Find a pension provider

The first step is to choose a pension provider (the company who looks after your pension). Pension providers all offer similar things, but some will spend more time trying to grow your money than others. And some will charge you higher fees than others will too! So, you should spend some time deciding which one looks right for you.

If you’re not sure where to start, we love the modern pension providers that are making it easier to save for retirement. They tend to have handy apps for your phone, so you can keep track of your money and watch it grow. And they often have cheaper fees to boot! Here are our favourites. And here’s the full range of the best private pension providers.

Best personal pensions

Find the best personal pension for you – you could be £1,000s better off.

Best personal pensionsBest personal pensions

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Best overall

PensionBee

PensionBee are leading the way with modernising pensions. The investment options are great for many pension savers, it’s an awesome app and website, which are both easy to use, and have tools and charts to show you how your money is growing – and importantly, how to hit your retirement goals.

It's easy to set up and get going, you can start a brand new pension, or simply transfer your existing pensions across.

You’ll pay one simple fee that decreases the more you save.

Fees: low (0.5% to 0.75%) for their core plans

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PensionBee rated 5 stars

Our friends at PensionBee are giving our readers a £50 pension contribution when they sign up with Nuts About Money too, just use the button below to get started.

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Simple and easy

Penfold

Originally built for the self-employed – for you! Penfold is a great app to get you going, with simple pension fund options to choose from and awesome features on the app to view your money at any time. Plus simple tables and charts to work out how much you should be investing to hit your retirement goals.

You don’t need an existing pension to use it, but if you do have one, or a few, you can move those overs too.

Fees: low (0.75% or 0.88%)

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Penfold rated 5 stars

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Best overall

Moneyfarm

Moneyfarm is like a financial advisor on your phone (or website), their experts will work with you to determine the best investment strategy. It’s low cost, with an excellent investment track record and great customer service.

You’ll pay one simple fee that decreases the more you save.

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Moneyfarm rated 5 stars

2. Choose a pension plan

Now your pension provider will help you pick a plan. Normally, they’ll just ask you a couple of questions to help you choose how your money will be looked after and how much you’ll pay for the pleasure.

Often, your plan will be dictated by how old you are and when you plan to retire. But our favourite providers have other options too, like only investing your money in ethical or socially responsible companies. 

Obviously, we love these plans as there’s nothing quite like knowing you’re saving the world and saving for retirement at the same time! PensionBee, Penfold and Moneyfarm all have options like these for you to choose from.

3. Start saving!

Now you’re all signed up, there’s only one thing left to do: start paying into your pension!

Some personal pension providers will ask you to pay a minimum contribution each month. But most are really flexible and will let you pay as much or as little as you choose. 

You can set up a direct debit to pay in regularly. Or you can just add in a little bit every now and then when you have some cash to spare. It’s totally up to you!

Remember, it’s sensible to put aside as much as you can afford to, as this will make life easier for you when you’re old and grey. But at the same time, you won’t be able to access any money you pay into your pension until you’re at least 55. So, it’s important that you don’t overstretch yourself either – you need to be able to live well now as well as later on in life! It’s all about finding the right balance for you.

Is there a limit to how much you can increase pension contributions? 

So, you can add as much as you want to your pension. But if you want to be able to benefit from that lovely tax relief we told you about, there are limits.

The maximum you can add to your pension while still benefiting fully from tax relief is £40,000, or up to your total income (e.g. your salary). This is known as the ‘annual allowance’ and is set by the government.

So, if you can somehow manage to put all your income into a pension, you’ll only be entitled to tax relief up to the amount you earn that year. In other words, if you earn £30,000 this year, the maximum you can put in your pension (while still claiming tax relief on the whole thing) is £30,000. Or, if you earn £25,000 per year, the maximum is £25,000 (unless you didn’t max out on your contributions in the last three tax years, in which case you can use any unused allowance up). It seems unlikely that you’ll have that much to add to a pension, but you never know, right?!

Bear in mind that if you’re going to be paying lots of money into your pension, there’s a limit to how much you can have in your pension over your lifetime without having to pay extra taxes. This is called the lifetime allowance and is currently £1,073,100 for the tax year 2021-2022. We know, it sounds like a lot and most normal folks probably won’t end up with this amount in their pension, but it’s not as unusual as you might think – that’s the compounding interest hard at work!

Pension lifetime allowance

Bear in mind that if you’re going to be paying lots of money into your pension, there’s a limit to how much you can have in your pension over your lifetime without having to pay extra taxes.

This is called the pension lifetime allowance and is currently £1,073,100. We know, it sounds like a lot and most normal folks probably won’t end up with this amount in their pension, but it’s not as unusual as you might think – that’s the compounding interest hard at work!

If you do go over this amount, when you come to withdraw it, you’ll have to pay extra taxes. If you take it out as a lump sum, you’ll pay 55%, and if you take it out as a regular income, you’ll pay an extra 25% on top of the Income Tax you would be paying. Ouch!

Over to you

Got some extra income that you can squirrel away into a pension? Go you! It’s a great idea to make extra pension contributions.

If your employer has agreed to match your contributions, you can increase your pension contributions to unlock more free money for your pension pot. Just let your employer know that you want to make additional voluntary contributions and they’ll sort the rest out for you. You’ll receive more tax relief too! (Reducing how much Income Tax you pay).

If, on the other hand, your employer will only make the minimum 3% contribution to your pension – or you’ve already maxed out your employer’s contributions – hold fire. Instead of increasing your pension contributions, you’ll probably be better off starting a personal pension alongside your workplace one.

That way, you get total control over your savings. And, you get to choose a top-performing provider with lovely low fees. Check out our reviews for our favourite pension providers, PensionBee and Penfold, to get started, or check out our best personal pensions.

You’ll still get all the awesome tax relief, it’s just refunded back into your pension automatically by the government.

If you’re unsure about making decisions yourself, and are looking for a personal recommendation, you could also speak to a financial advisor. You can find the best one for you with Unbiased¹.

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