New research from investment platform Hargreaves Lansdown shows almost a fifth of people (19%) don’t know how much they and their employer are putting into their pension each month. This figure rises to one-third among over-55s – an age group on the brink of retirement.
The data highlights a worrying lack of awareness among savers. It comes after separate research was published by Scottish Widows over the summer, showing that almost 30% of people have no idea of their retirement needs.
Against today’s tough economic backdrop, understanding how much money you need in old age is more important than ever. The cost-of-living has soared in recent years, with retirement costs skyrocketing as a result.
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The latest figures from the Pension and Lifetime Savings Association (PLSA) show a couple needs £59,000 per year for a comfortable retirement. A single person needs £43,100. Even a basic retirement (which doesn’t include the cost of running a car) costs £22,400 per year for a couple and £14,400 for a single person.
None of these figures include housing costs, but with a growing number of retirees still renting or paying a mortgage, these outgoings should be factored in as well.
On top of this, people are living longer meaning many of us will need to consider the prospect of funding our lifestyle into our eighties and nineties. Some will even live to see triple digits.
“If you don’t know what’s going in, then you won’t know what you are going to get out of your pension, and so we risk people sleepwalking into retirement with nowhere near enough to meet their needs,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
With this in mind, we look at how to check your pension contributions, whether you should increase them, and why it matters.
How to check your pension contributions
In the UK, auto-enrolment rules mean that all employers are legally obliged to provide a workplace pension scheme. If you are classified as a “worker” and are aged between 22 and state pension age, you will be automatically enrolled into your workplace scheme, provided you earn at least £10,000 per year. Full details can be found on the government website.
Under these rules, employees automatically contribute 5% of their earnings to their pension scheme and employers contribute 3%. This is sometimes known as the 8% pension rule. Some employers will pay more than this or increase their contributions if you increase yours.
If you don’t know how much you are contributing to your pension each month, it is likely to be 5% of your earnings, unless you have opted out or told your workplace scheme you want to reduce your contributions. This is generally a bad idea, as reducing your contributions could mean you lose some or all of your employer contributions too.
You also receive tax relief on pension contributions, meaning HMRC effectively “refunds” you any income tax at your marginal rate. Basic-rate taxpayers receive 20%, higher rate taxpayers receive 40% and additional-rate taxpayers receive 45%.
If you’re still not sure how much you are paying into your pension pot, a failsafe way to check your contributions is to look at your payslip. Your payslip usually has a section showing your “deductions”, which is generally where you will find this information. Employee contributions will sometimes be shown under the words “EE pension”, while employer contributions can be indicated by the words “ER pension”.
Alternatively, your annual pension statement will also tell you how much you and your employer have contributed over the past year.
Why does it matter, and should you top up your pension?
Magic money trees don’t exist, but if they did, they might look something like a workplace pension scheme. This is thanks to the employer contributions and tax relief you earn when you make a contribution. So, should you increase your pension contributions?
Upping your contributions isn’t possible for everyone, as it means sacrificing current income. Under current rules, you can’t access your private pension until you turn 55 (set to increase to 57 from April 2028). Many families are still feeling the effects of the cost-of-living crisis and are having to focus on the here and now rather than their financial future.
However, if you can afford to go the extra mile, it could pay dividends in the future. Commenting earlier this year, Becky O’Connor, director of public affairs at PensionBee, said: “Even a small increase can make a difference over time and the power of compound interest means the earlier and more you save, the more your money will grow.”
She recommends increasing your contributions by 1-2% and regularly reviewing your finances, particularly after pay rises or reductions in expenses.
“It’s also well worth checking to see if your employer offers a salary sacrifice arrangement on their pension,” says Morrissey. Schemes like this allow you to give up a portion of your salary in exchange for benefits like pension contributions.
She explains: “As your salary is lower, then so are your income tax and National Insurance contributions, so you are able to maintain pension contributions with higher take home pay.
“The employer also saves on their National Insurance contribution. This is something employers may increasingly look at as the rate they pay was hiked in the recent Budget and will hit 15% in April.”
Circumstances where you might want to think twice
When you start drawing on your pension, you can take up to 25% of your pot without paying any tax (up to a limit of £268,275). But many savers continue to contribute to their pension beyond this point thanks to the other perks on offer (such as employer contributions and tax relief on the way in).
Under current rules, you can also leave your pension to a beneficiary in your will and they won’t have to pay any inheritance tax (IHT) on it – but this is changing from April 2027. This was one of the policies announced by chancellor Rachel Reeves in her Autumn Budget.
Changes in the Autumn Budget could deter some wealthier savers from topping up their pension, “particularly those who had been stuffing their pension in order to pass it on,” says Gary Smith, retirement specialist at wealth management firm Evelyn Partners.
“The cap on pension tax-free cash at £268,275 means that some will still have an eye on the old Lifetime Allowance of £1,073,100, and be reluctant to add to their pension savings beyond that,” he explains, particularly now that pensions can’t be used as an IHT planning tool going forwards.
“They could instead pay down their mortgage, seek out more IHT-efficient assets, or give to charity,” Smith adds. “Or, they might decide to divert the money that was going towards their own pension contributions into lifetime gifts to family, such as into Junior ISAs or a pension for adult or child relatives.”
If you are looking to maximise your pension contributions, the other thing to bear in mind is that there is an annual limit of £60,000. This includes contributions from yourself, your employer, plus any tax relief.
