Three pension changes could add £243,200 to your retirement pot

Making small changes to your could add up to £243,200 to your pot for someone earning just under the average salary in the UK. Personal finance experts at Interactive Investor have highlighted three steps to take to improve your wealth in your golden years.

The first suggestion is to change jobs to an employer that pays in more than the minimum 3% into your scheme. Someone earning £35,000 who moves to an employer with a 5% employer pension contribution could accrue an extra £116,700 by retirement. The average salary for a full-time employee in April 2024 was £37,430.

The second tip is to make the most of salary sacrifice schemes and reinvest the tax saving. Salary sacrifice is an arrangement where you agree to reduce your entitlement to cash pay, usually in return for a non-cash benefit, such as pension contributions. Interactive Investor says basic-rate taxpayers save £8 in National Insurance for every £100 they contribute to their pension, while higher-rate taxpayers save £2 for every £100 they contribute.

They estimate that someone earning £35,000, contributing 5% of their pay to their workplace pension and directing the £12 monthly National Insurance saving to their pension – either a workplace scheme or a SIPP - could increase their pot by £27,600 over 40 years.

Finally, saving an extra £50 to your pension each month after getting a pay rise for 40 years would boost your retirement wealth by £98,900, assuming 5% investment growth and that they increased their total contribution by 2% each year. This additional £50 would only cost £40 for a basic-rate taxpayer, £30 for a higher-rate taxpayer, and £27.50 for an additional-rate taxpayer, due to tax relief.

These three changes combined would add £243,200 to the pension pot of someone earning £35,000, while someone earning £60,000 would get an extra £312,400, and someone on £100,000 would boost their retirement wealth by £454,800. This assumes 40 years of contributions and 5% annual investment growth net of fees.

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Camilla Esmund, senior manager at Interactive Investor, said: “It’s encouraging that you don’t need to be a high earner to add substantial sums to your pension with some modest tweaks. Taking simple steps like filling in salary sacrifice forms or checking employer contributions when you move jobs could boost your pension significantly over your working life.

“Although the state pension has improved in recent years, it still isn’t enough for a comfortable retirement. So, taking steps now to boost your workplace pension is vital to get your retirement savings on track.

“Not everyone is in a position to move jobs, but when the time comes, it’s vital to find out more about the pension. It forms a crucial part of your pay package and varies significantly between employers - some pay in just 3% while others pay up to 15%. Over years of work that could add thousands to your pension wealth and make the difference between a basic and more comfortable retirement.

“If you want to top up your pension, then using a SIPP alongside your workplace pension can be a great way to build retirement wealth. A SIPP allows you to tweak your contributions each month, which is really useful if you have some more expensive months and want to vary the amount you pay in.”

Craig Rickman, personal finance expert at interactive investor, said: “Salary sacrifice is a great and simple way for all workers, but particularly those on low to modest incomes, to improve their future financial security at no extra cost.

“Unlike tax relief, salary sacrifice is a better deal for lower earners because they can save 8% NI on pension contributions. This saving comes on top of 20% tax relief, meaning it costs just £72 to pay £100 into their pension. In contrast, higher-rate taxpayers save just 2% NI on pension contributions due to the lower rate for earnings over £50,270. By adding this tax saving into your workplace pension or a SIPP, basic-rate taxpayers could deliver a meaningful boost their pension wealth.”

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