The UK government introduced the compulsory workplace pension scheme in October 2012. The initial implementation phase, known as “automatic enrolment”, occurred over six years. At the outset, the average employer pension contribution in the UK was 2%, and the average employee contribution was 3%.
| Does pension contribution in the UK reduce your tax-home income? | Definitely |
| What is the workplace pension contributions amount in the UK? | The minimum contribution is 8%, but it depends on the employer, workplace pension auto-enrolled, and pension scheme rules |
| Is the average pension contribution enough for a comfortable retirement? | It depends on factors such as individual financial goals, other investment savings, and retirement goals |
| When did the auto-enrolment pension scheme occur in the UK? | October 2012 |
What is the average pension contribution percentage in the UK?
Average pension contributions in the UK changed significantly on the 6th of April 2019. The original contributions and the amended figures and what they mean are shown in the table shown below.
| Date | Employer contribution | Employee contribution | Total contribution |
| Up to 5 April 2019 | 2% | 3% | 5% |
| From 6 April 2019 | 3% | 5% | 8% |
Source: UK Gov
Based on a salary of £32,000 per annum, the average pension contribution for UK employees and employers looks like this:
| Gross Salary | £32,000 |
| Minus Lower earnings threshold | £6,240 |
| Qualifying salary | £25,760 |
| Employer contribution (3%) | £772.80 |
| Employee contribution (5%) | £1,030.40 |
| Tax relief | £257.60 |
| Total contribution | £2,060.80 |
As shown in the table above, your earnings threshold is deducted from your gross salary to give you your qualifying salary, on which pension contribution calculations are made. Pension contributions tax relief, which is generated on employee contributions, is also added.
The success of workplace pensions
The workplace pension scheme, with employees being automatically enrolled, was introduced by the UK government in 2012. It was introduced because many people relied solely on their state pensions for income in their retirement. The attractions of workplace pensions are the employer contribution element, which is a freebie as far as the employee is concerned, and the tax relief.
By law, typically, the average employee pension contribution in the UK is at least 5%. The UK’s average employer pension contribution percentage, also by law, is 3%. With some employer pension schemes, the employer matches your contributions or may even exceed them. It is down to the individual employer.
Since the introduction of automatic enrolment in workplace pensions in 2012, the participation rate has risen from 47% in 2012 to 79% in April 2021, which amounts to 22.6 million employees.
Depending on the lifestyle you aim for in your retirement, your workplace pension, plus your state pension, may or may not provide the retirement income you desire in retirement.
How much should I contribute to my pension?
According to the pension “half your age” rule guide, an easy-ready reckoner to indicate how much your pension contributions should be is to take the age at which you started contributing to your pension and divide it by two. The answer gives you the percentage of your gross salary you should ideally contribute until you retire.
Using this theory, if you start your pension when you’re 28 and your gross wage is £35,000 per annum, 14% of that means you should be contributing £4,900 per year or £408.33 per month. However, as shown in the table above, the UK average pension contribution total is only £2,060.80 (including both the employee and employer’s pension contribution) – some £2,439.20 per annum short.
How much pension do I need?
The telegraph.co.uk published the following figures (from the Pensions and Lifetime Savings Association – PLSA) in terms of the annual income you will need in retirement to enjoy three levels of lifestyle:
| For a single person | For a couple |
| £14,4K – for a minimum lifestyle | £22,4K – for a minimum lifestyle |
| £31,3K – for a moderate lifestyle | £43,1K – for a moderate lifestyle |
| £43,1K – for a comfortable lifestyle | £59K – for a comfortable lifestyle |
How to calculate your retirement income needs
When planning what sort of retirement income you will need, you must consider a host of things. According to citizensadvice.org.uk, these things include:
- All income streams you will have in retirement.
- Debts – paying back any borrowings.
- Expenses – both you and your partner
- Fuel bills.
- Mortgage or rent costs.
- Planned retirement age.
- Retirement lifestyle.
- State pension age.
What extra money might I need in retirement?
As well as the “everyday” costs during retirement, you also need to think about unforeseen extras. For example, you could have to carry out essential property repairs, or your car might break down and require expensive repairs. You might also face health challenges and have to pay healthcare costs.
You must consider everything to ensure you accumulate a big enough pension pot to satisfy all your wants and needs. We will come back to this again a little later on.
How long will my retirement be?
On average, we are now living longer. A report published on the ONS website entitled, “What is life expectancy? And how might it change?” indicates that men aged 65 can now expect to live to 85.6 and women to 87.8.
Whatever retirement age you choose, your retirement income may have to last longer than initially thought. This is because the average pension contribution in the UK in terms of workplace pensions might not be enough.
How much state pension will I receive?
Most UK citizens are entitled to the state pension, provided they have made sufficient NI contributions. However, you must have completed at least 10 years’ worth of contributions to get the new State Pension. 35 years’ worth of contributions will entitle you to the full new state pension of £220.21 per week. You may also have a workplace pension.
Suppose you make the average employee pension contribution for a UK workplace pension and get the average monthly pension contribution from your employer. You can use the Moneyfarm online pension calculator to predict your pension pot’s likely size and potential retirement income.
If you are employed, aged between 22 and the State Pension age and you earn at least £10,000 per annum, your employer should offer you a workplace pension. We’ve already discussed the average pension contribution in the UK, but what if you are self-employed? If you are, you should start a self-employed pension. In this case, you will be responsible for organising your own self-employed pension contributions, both in terms of NI contributions for the State Pension and contributions to any private pension you may have.
How big should my pension pot be?
To decide how big your pension pot should be, we refer to the paragraph above entitled, “What’s my target income in retirement?” If we take those figures for the various lifestyles.
Looking at a single person buying an annuity when you retire, you would need to have a pot worth between £40k to £60k (plus your State Pension) to reach the minimum standard according to the PLSA. As a single person aiming for the PLSA moderate standard, you’d need a pot worth between 300k to £500k. For the PLSA comfortable standard you’ll need a pot worth between £490k to £790k.
In terms of pension drawdown, as a single person, you’ll need pots worth £70k for the minimum PLSA standard, £490k for moderate, and £790 for comfortable.
According to ONS, the median average pension pot in the UK for those under 35-year-olds is £500, while for those aged 55+, it is £37,600. It’s only enough to cover a minimum lifestyle.
How to compare pensions
If you change employment several times during your working life, all the while making average pension contributions, you will accumulate several workplace pensions. Some may perform better than others. You can use a pension calculator to compare their performance.
You may decide a pension transfer exercise is needed to amalgamate them into the best-performing account.
Most workplace pensions today are defined contribution (DC)schemes. You might have a defined benefit (DB) pension among them. You can transfer a DB pension scheme to a DC pension scheme, but it’s best to seek advice.
Another option you could explore is getting a pension refund. This could give you other investment opportunities, not just pension options. There is an informative pension refund blog on the Moneyfarm website.
How will higher-than-average pension contributions in the UK affect me?
Making higher than the UK average pension contribution payments should result in a bigger pension pot and, therefore, more income in your retirement years. But don’t forget that private pensions are investments, and as with any investment fund, values can fall as well as rise. The good thing is that pensions are long-term investments, and investing long-term is a recommended way to minimise risk.
Use a private pension calculator for a projected pension pot valuation
If you can afford to pay more than the average pension contribution in the UK, it is well worth considering, as the compound interest factor will work even more in your favour. A pension calculator for UK pensions will help you project what size of pension pot you can expect. The Moneyfarm calculator we mentioned earlier is a pension contribution calculator that uses your current age, the existing pot value, and the pension contributions both you and your employer make to work out the projected pot size when you input your target retirement age.
Some people have salary sacrifice schemes. These schemes mean you take home less money, but the salary sacrifice you make can build your pension pot even higher.
How to increase your retirement savings
If you and your employer are only paying the average pension contribution in the UK into your workplace pension, you may find that it will not be enough, even taking your State Pension into account. It’s a good idea to use a pension pot calculator to give you advance warning. If you believe you will have a shortfall, you can then look at other pension options, including a self-invested personal pension, or SIPP for short.
Many people review their financial plans in their 50s as the prospect of retirement begins to loom closer. The Moneyfarm website has some useful information on 50s retirement savings.
Deferring State Pension
If you decide to continue working after you’ve reached State Pension age, deferring your state pension is an option you can take if you want to avoid paying too much income tax. You don’t apply for your state pension until you’re ready. However, when you apply, your payments will be increased to compensate for the deferral.
FAQ
What is a pension contribution?
A pension contribution is the money an individual or their employer puts into a pension scheme towards their retirement. This money is invested and can be used to provide income in retirement.
What are some of the ways to increase contributions to be more than the average pension contribution in the UK?
There are several ways to increase pension contributions. They include contributing a higher percentage of your earnings to a workplace pension scheme or workplace pension ‘salary sacrifice,’ getting a higher-paying job, negotiating a higher contribution rate with your employer, and investing in a personal pension plan.
Can I contribute more than the average pension contribution in the UK?
Definitely. Some individuals may decide to contribute more than the average pension contribution to increase their retirement savings, especially if they are high-income earners. This can be done through a workplace pension scheme, a personal pension plan, or other investment vehicles.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
