3 valuable reasons you should increase your pension contributions when your earnings rise

When you receive a pay rise, the first thing that may come to mind is buying a bottle of champagne to celebrate. Rightfully so, too; you deserve to enjoy the fruits of your hard work.

After you’ve finished celebrating, it may be worth putting that extra income to work by voluntarily increasing your pension contributions. By upping your pension contributions to better reflect your current financial situation, you could boost your retirement fund and ensure you can live your desired lifestyle when you stop work.

Despite the benefits of increasing your pension contributions after a pay rise, you may be surprised to learn that many in the UK don’t do this. Indeed, FTAdviser reports a study from the Institute of Fiscal Studies that found no relationship between pay increases and contributions to pensions.

The financial body said that things such as large wage rises, paying off a mortgage, or increased tax incentives seemingly had no impact on whether employees increased their retirement savings. 

So, continue reading to discover three interesting reasons it could be beneficial to increase your pension contributions if your earnings rise. 

1. You might not be saving enough 

The first, and perhaps most important, reason to increase your pension contributions after a pay rise is that you may not be saving enough in the first place. 

This isn’t uncommon, according to FTAdviser, as the Department for Work and Pensions (DWP) say that 12.5 million people are undersaving for retirement.

Indeed, the DWP research showed that 38% of working-age people weren’t putting enough away for retirement, with the level of undersaving increasing to 43%, or 14.1 million people, when the majority of an individual’s defined contribution pension is converted into an annuity. 

If you don’t save enough for retirement, you could find it challenging to maintain your desired lifestyle in your later years. You may need to downsize your home or make compromises to the standard of living you’d ideally like.

2. It could boost the size of your pension pot and give you a more comfortable retirement

When you increase your pension contributions after a pay rise, you’ll help to boost the total size of your pension pot.

Brewin Dolphin gives an excellent example of this. Imagine you have a salary of £55,000, are a member of an auto-enrolment scheme, and pay 5% of your earnings into your pension pot. You would make a £183.46 contribution each month and receive roughly £3,302.38 in take-home pay.

If you’re on an auto-enrolment scheme, your contributions are based on a percentage of your “qualifying earnings”, which, in the 2023/24 tax year, are £6,240 to £50,270. This means that your workplace pension contributions may remain static once your salary exceeds £50,270. 

So, in the above example, if your salary increased to £60,000, your pension contributions may remain at £183.46, while your take-home pay would rise to £3,544.04. 

Even though it may be tempting to keep this extra £240 a month, contributing it to your pension could be a fantastic way to ensure that you will be adequately supported through retirement – especially when you’ll benefit from tax relief on those contributions. 

3. Your employer might match your contributions

If you receive a pay rise and increase your pension contributions, your employer may start to pay more into your workplace pension. This is called “contribution matching” and, according to MoneyHelper, can be a fantastic way to boost the total value of your pension pot. 

Imagine you contribute 3% of your salary to your workplace pension while your employer contributes 5%. Even though this could already be an agreeable sum of money each year, your pension pot could benefit even more if you increase your own contributions. 

In the above example, let’s say you increase your contributions to 8% of your salary. Since your employer has agreed to match your extra 5% contribution, they would increase theirs to 10%. 

As you can see, you’re not only increasing your own contributions to your workplace pension after a pay rise, but also benefiting more from your employer’s contributions, boosting the size of your retirement fund in the long run.  

Get in touch

If you want to boost your savings and are looking for advice on how you can make a rise in earnings work for you, please get in touch with us today to find out more.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Approved by The Openwork Partnership on 15/05/2023.

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