What are the minimum workplace pension contributions?
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
Investing for your future is made easier through a workplace pension, but are you giving enough thought to the workplace pension contributions you are making each month?
Currently, the minimum you must contribute is 3% of earnings between £6,032 and £46,350, with your employer contributing 2%, bringing the total minimum contribution to 5%. The government adds 0.6% tax relief on your contribution, meaning your contribution rate actually works out as 2.4%, 2% from your employer and 0.6% from the government, bringing the total minimum contribution to 5%.
From the 6th of April this year, contribution rates are set to change.
Your minimum contribution will be 5% of earnings between £6,136 and £50,000, with your employer contributing 3%, bringing the total minimum contribution to 8%. The government will add 1% tax relief on your contribution, meaning your contribution rate actually work out as 4%, 3% from your employer and 1% from the government, bringing the total minimum contribution to 8%.
These minimum contributions are great value for your money as by making them you also benefit from employer contributions and tax relief.
Typically, your investment will go into funds that aim to grow over the time, with this growth then compounded into further growth. Continued contributions and long-term growth can help add up towards a nest egg that pays for your lifestyle in retirement. Think of it like this, you’re basically making a small contribution which will come back to you when you need it most. It is a little money now for a lot of money later.
That’s why it could make sense to go beyond the minimum workplace pension contributions. Have a think about your disposable income, how much extra could you put towards your workplace pension contributions? Remember, the more you put away, for the longest amount of time possible, could result in greater returns later. Rather than asking yourself what the minimum contribution is, ask yourself what is the maximum contribution you can afford?
For example, if you earned the UK’s average salary of £27,000, based on the new contribution rates from April 6th 2019, you would see a contribution of £69.90 come from your monthly salary, your employer would contribute £52.42 and you would receive £17.47 in tax relief, taking the total monthly contributions to £139.79.
Contributing more means exactly that, more money for your retirement. There’s potentially decades of life you’ll want to live to the fullest in retirement, and minimum contributions may not be enough to pay for the lifestyle you desire. Contributing as much disposable income as you can afford, for the longest possible period of time, is a sensible strategy, especially when you consider how your money could grow and the benefits of compounding the growth from the funds you are invested in. Over the long term, growth combined with continued contributions can progress into a substantial sum.
The aim of minimum workplace pension contributions is to get you going towards your retirement goal. It isn’t a case of then sit back – to be successful you need to stay disciplined over the long term and commit as much disposable income as you can towards your contribution. At the end of your career, any money you contribute now, has the potential to come back to you worth even more.
Don’t settle for the minimum in retirement, do more with your money today and consider increasing your workplace pension contribution.