What Is A Good Employer Pension Contribution?

Employer pension contributions can vary massively across different industries and different companies. A really generous, good employer pension contribution could be as much as 20% of your annual salary. But on average, you could expect between 7% – 14% contribution from your employer in the private sector. Some employers, particularly larger corporations, might offer very high pension contributions as a generous employee benefit. In contrast, small businesses may only offer the minimum mandatory contribution.

It’s important to consider whether the employer pension contribution at your current job (or prospective job) is in line with your goals for the future. For example, there is evidence to suggest that the average millennial will need £1,000,000 in their pension pot to retire comfortably at age 65. One million pounds sounds astronomical. But it’s important to remember that inflation rates will only increase over the course of your lifetime. It’s a good idea to get your pension sorted from the start of your working life.

What is a good employer pension contribution?

The good news is, you don’t have to save £1,000,000 over your working life. When you carefully invest or leverage a generous employer pension contribution, your money will make more money due to interest. Phew!

Your pension is invested. Meaning that any money yourself or your employer contribute to your pension is invested into the stock market where it can grow to a larger amount due to interest.

So what is a good employer pension contribution? It really depends on the sector you work in.  Ideally, you want to look for a scheme where your employer will pay more than the statutory 3% of your total earnings. Look out for a scheme that could offer you 10% or even 20% of your total earnings to really maximise this benefit.

Let’s investigate a little further…

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What is the minimum pension contribution your employer must pay?

Your employer must enrol you into the auto-enrol pension scheme in the UK if you are eligible for automatic enrolment. If you have been auto-enrolled into the workplace pension scheme, your employer must pay a minimum of 3% of your total earnings into a pension scheme. You must pay 5%. This is the mandatory minimum. Although you or your employer can of course increase the percentage paid into the scheme. You can also opt out of your auto-enrolment contributions, but this isn’t recommended.

You can use a workplace pension calculator to help you figure out how much you and your employer are paying into your workplace pension scheme each month. This can be really helpful when it comes to future financial planning. It helps in deciding whether your pension contributions are going to be enough to sustain the lifestyle that you want when you retire. It can also help you to determine at what age you could retire, based on your current contributions.

Let’s look at an example using the workplace pension calculator. If you earn £30k a year, and you pay 5% into the scheme, and your employer pays 3%, your contributions each month will look a little like the below:

Your pension pot would have £200 a month deposited into it for retirement. That’s £2,400 a year towards your pension. That isn’t an awful lot in the grand scheme of things. Especially when you consider that you could potentially be spending 40 years of your life as a retiree in the future!

Employer contributions and matched contributions

Pension schemes can certainly differ dramatically from one workplace to the next. As mentioned above, the minimum pension contributions in the auto enrolment workplace pension scheme is a combined total of 8% of your total earnings (5% employee, 3% employer). But not all employers will pay only the bare minimum.

Some employers may automatically offer larger contributions such as 8%, 10%, 14% or 20%. If you continued to contribute just 5%, and your employer contributed 20%, you’d have a combined total of 25% of your total annual earnings going straight into a pension pot. That’s a very generous employer pension contribution!

Let’s look at this example. Again using the Money Advice Service workplace pension calculator, based on an annual salary of £30k:

As you can see, £625 per month is an astronomical difference compared to the £200 minimum contribution. That’s £7,500 going into your pension scheme each year. Enough to make you consider switching employer, that’s for sure!

Other employers may offer a matched pension scheme. They might say that they will contribute 5% as standard, but offer 10% matched. This means that when you contribute 10%, they will also contribute 10%. Meaning you’d have a total of 20% of your annual earnings going into your pension pot. This is still a pretty generous scheme when compared to employers who contribute the statutory minimum of 3%.

Let’s review this example. Again using the pension calculator based on a salary of £30k:

Although you’d be paying an additional amount into your pension fund yourself, your employer would also be doing the same. £500 is significantly more than that first example we looked at using the 3% and 5% minimum contributions. In this example, you’d have £6,000 deposited into your pension scheme every year.

How does your employer pension contribution compare to others?

If you haven’t moved between different industries before, or perhaps you have stayed with the same employer for many years, it can be difficult to know how your employer pension contribution compares to others.

I asked my Instagram following what their employer matched pension contributions were. I got some interesting results which you can see in the table below. The most popular employer matched pension contribution was 10%. That means that the respondents could put in 10% of their annual earnings into the pension scheme, and their employer would match it at 10%. This means they would have a total of 20% of their annual earnings in their pension pot.

Employer matched pension contribution Number of respondents

Where do you sit on the scale? I was shocked to see that two people are lucky enough to have a 27% matched pension from their employer! Now that is a great benefit incentive. Something that would likely influence a decision on taking on a new role.

I also polled my Instagram following on whether a pension scheme has ever influenced their decision on whether to take a job. 22% (28 respondents) said yes, 78% (101 respondents) said no.

Employer pension contribution is certainly something to consider if you are trying to decide between two job roles, and when you consider a job offer and benefits package as a whole. It’s interesting to think of a generous employer pension contribution as a pay rise of sorts.

If a job offer lists a 20% employer contribution? That’s an extra 20% that you receive from your employer. Which can then grow to a larger amount when invested in your pension. To take the £30k salary example again, your employer would essentially be giving you an additional £6k through the employer pension contribution scheme. Taking your overall compensation from your employer to £36k.

How much do you need to contribute to your pension?

How much you yourself need to contribute to your pension will largely depend on your goals for the future, and the amount your employer is prepared to pay into your pension. As a rule of thumb, if you can afford it, it’s a great idea to match the amount your employer is willing to pay. For example, if your employer matches your contributions up to 10%, it’s worth considering taking advantage of that benefit (it’s essentially free money!).

However, if your employer only contributes 3%, you may need to get a little savvier about how much you contribute. Use a retirement calculator to work out how much you’d like to retire with. Then you can work out how much you’d need to be contributing to your pension each month alongside the employer contribution of 3% to get there.

It is worth coming up with a few different scenarios. This helps to work out a best-case and worst-case scenario when it comes to your pension. For example, best case might be that you will be owning your own home when it comes to retirement. Worst case might be that you will be renting, and have other financial factors at play such as needing to help fund care for a loved one or spouse.

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Negotiating a higher employer pension contribution

If you’re negotiating a new job offer and your prospective employer isn’t budging on the salary offer, it’s a great idea to leverage a higher employer pension contribution instead. Some employers might be more open to increasing the percentage they contribute to your pension over an increased salary.

Benefits can be negotiated just as much as salary. If you are refused an increase in salary, ask your employer or prospective employer if they will consider increasing their pension contribution instead. You can also negotiate on other aspects of the offer such as holiday, flexible working and learning and development opportunities.

The employer pension contribution can have a huge impact on your future. If your employer only offers a 3% contribution, you will have to put 7% more of your own money into the scheme to get to the same point as someone else whose employer offers 10%! For that reason alone, it’s worth asking the question.

Learn more about pension contributions

Pensions are often not discussed very openly. It’s important to learn more about how your pension can affect your future, how much you need to be contributing, and how to find out how much you have currently got in your pension pot.

If you’ve had a number of different employers over the years, it’s a great idea to combine your pensions (I highly recommend PensionBee for this service) so that all of your pensions are with one provider. It also gives you the opportunity to see exactly how much you have in your pension pot. And how much more you might need to put away for retirement.

And if you’d like to know more about personal finance and financial wellbeing in the workplace? Book me for a corporate financial wellbeing workshop by getting in touch at hello@thriftylondoner.com.

As a qualified financial coach, I offer corporate financial wellbeing workshops which are affordable and effective. I aim to fill in any information gaps around personal finance in an accessible, jargon-free way.

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Final thoughts on employer pension contributions

Pension contributions are a really important part of our working lives. They truly can set us up for comfort in the future. Looking after your future self means that you won’t have to depend on other people in your retirement. You can retire comfortably and happily. Because who wants to stress about money in their 60s?

It’s a huge bonus to get a great employer pension contribution. So do look out for this when applying to and accepting new job roles. And if you’re happy in your current role? Do push for a higher employer pension contribution as part of your remuneration package. The benefits of working for an employer who can offer a high percentage contribution are huge.

A high employer pension contribution helps take the pressure off you to save (and invest) the majority of your pension fund yourself. A generous employer contribution means that to get to that golden ticket amount of £1,000,000, you don’t have to make bigger sacrifices in the short term to get there.

Many will have to invest heavily in the stock market alongside their workplace pension scheme to supplement their retirement fund. Investing in the stock market is great. But isn’t it better if someone else (your employer) saves money for you as well?

Asking for more information about your current pension scheme or prospective pension scheme is always going to be beneficial. Sometimes, your pension information isn’t readily handed over to you. Make sure you take action and find out that information for yourself when starting a new job (or even at your current job if you are unsure of your current scheme).

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