Want a better pension than your colleagues? Here’s how to get it

For the majority of us, our workplace pension will be the foundation upon which our retirement plans are built. While you can’t usually choose which provider your employer uses for your workplace pension, there are a number of variables you can control, and making the right choices could make a significant boost to your retirement savings.

Taking a look at how much you’re contributing, how the money is paid, and what you’re investing in can pay off in the long run. For example, under auto enrolment rules, employees will have 5pc of their salaries taken for pension contributions as standard, in addition to a minimum 3pc employer contribution and government tax relief. However, the consensus from experts is that workers need to pay in far more if they want to have a comfortable retirement. Upping your own contributions will always increase the tax relief that’s paid into your pot – but you may find your employer will contribute more, too.

Here, Telegraph Money talks you through some of the ways you can improve your workplace pension, and steal a march on your colleagues.

Choose your own pension funds

When you’re auto-enrolled, your contributions are usually directed to the pension scheme’s “default” investment plan. But what many people may not realise is other plans are available, and they may well offer more potential for investment growth.

As a guide, the higher the percentage of equities (company shares) in your pension plan, the higher the potential for growth. So, if your workplace default fund is 60pc invested in equities, you might look at an alternative, if available, that invests in 80pc equities instead – some might even go up closer to 100pc.

Becky O’Connor, director of public affairs at PensionBee and The Telegraph’s Pensions Doctor, said: “In terms of average returns, over a long period, you might reasonably expect a plan with a higher proportion of equities to produce an average annual return of 5pc, whereas one with a lower proportion of equities might not stretch much further than 3pc a year.”

Many default plans also automatically “de-risk” the closer they get to their stated target retirement date. This involves switching increasing amounts of higher-risk investments for low-risk options, or cash – the theory being that if you want to start drawing down soon, you’ll be in a vulnerable position should your savings take a dip in a volatile market. However, de-risking can also mean reduced growth. If you’re in a situation where you don’t plan on retiring for many years and you find your pension is already being de-risked, you might consider switching your plan to one with higher growth potential.

Of course, the flipside of a higher exposure to equities is that over the shorter term, greater volatility might also lead to declines in value – and this is absolutely not what you want if you are close to wanting to take money out of your pension.

In general, if you prefer the investment options available to you from personal pensions, or want greater choice about where your money is invested, you might consider asking your employer if they’ll pay contributions to one you’ve set up. Not all employers will agree to this, but it’s worth asking the question.

There’s data to back up the benefit of choosing your own investments, too. Analysis of the top 10 funds chosen by the 19,000 members of the Hargreaves Lansdown workplace pension who make their own investment decisions found that they achieved annual returns more than four percentage points higher than the default fund over a five-year period.

Get a higher contribution from your employer

By far the most effective way to get one up in the pensions department is to increase your contributions – regardless of your employer’s policies, paying more into your pension will benefit you in later life.

But to properly plan your pension, you’ll need to find out your employer’s pension contribution policy. For example, as we mentioned, the minimum total contribution under auto enrolment rules is 8pc, with 5pc (including tax relief) coming from you, the employee. Employers put in a minimum of 3pc – and some will only ever offer this much. Others will pay in a higher percentage as a flat rate. 

Where you can make a huge difference is if your employer offers to match your contributions – particularly if it’s up to a generous amount. If you choose to increase your payments, say, by a further 5pc, some employers will match this additional contribution either directly (ie. they will also put in 5pc), or “double match” it, so if you put in 5pc in total, they will contribute 10pc.

Remember that pay rises will also have a positive effect on your pension; as pension contributions are usually taken as a percentage of what you earn, any time you receive a salary increase both you and your employer will pay more into your pension pot as a result.

Minimal increases to your contributions count, too

When other financial priorities take over, it’s heartening to know even small increases can have a positive impact on your pension contributions, said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown: “Be savvy to this kind of minimal effort, and you may just pip your colleagues at the post.”

The examples below assume retirement at 68, a baseline of 8pc pension contributions, annual investment returns of 4.25pc and annual charges of 0.75pc.

Age 32 and earning the national average of £33,000 a year. Rather than have an extra £30 in your pay packet, increase your pension contribution from 8pc to 9pc, and end up with £26,000 extra in your pension pot by the time you retire.

Age 42 and earning £50,000 a year. If you forgo an extra £40 in your pay packet and increase your pension contribution from 8pc to 9pc, you could end up with £23,500 extra in your pension pot by the time you hit retirement.

Age 52 and earning £70,000 a year. Rather than have an extra £60 in your pay packet, increase your pension contribution from 8pc to 9pc and end up with almost £17,000 extra in your pension pot by the time you retire.

Salary sacrifice vs net pay vs relief at source

While you and your colleagues are likely to be in the same pension scheme, you might get one up in the pension department on your peers working for other companies if the type of pension arrangement your company offers is more generous.

In a net pay scheme, pension contributions are deducted from your gross salary – before tax has been deducted. You’ll then only pay tax on whatever salary is remaining after this deduction. It means that you automatically receive tax relief at your highest rate of income tax.

“Low earners in this kind of arrangement might be better off asking their employer if they are happy to pay their contributions into a personal pension instead, as these are relief at source schemes, where tax relief is applied automatically,” said Ms O’Connor.

In a relief at source scheme, pension contributions are deducted from your net salary – after tax has been deducted. But the employer only deducts 80pc of the total contribution from your salary; the pension scheme then adds an amount equal to 20pc basic-rate tax relief, which it then reclaims from HM Revenue and Customs. The scheme adds this top-up to your contribution, whether or not you’re earning enough to pay tax in the first place.

“Low earners in this kind of arrangement are marginally better off than low earners in net pay schemes currently, although the Government has pledged to resolve this inequality,” explained Ms O’Connor.

Salary sacrifice, as the name indicates, involves giving up a portion of your salary, with your employer instead paying you a “non-cash benefit” – that is, pension contributions.

This kind of arrangement means that not only do you get tax relief upfront on your contributions, there will also be a reduction to employee and employer National Insurance contributions, which can mean you are better off from a tax saving perspective than either net pay or relief at source arrangements.

Here’s an example of how the three schemes work for you if you earn a salary of £60,000.

• Net pay: If you make a £1,000 personal pension contribution via the “net pay” method, you’ll receive your 40pc income tax relief upfront automatically, effectively “costing” you just £600.
• Relief at source: If you’re in a relief at source scheme, you’ll need to make an £800 personal contribution from your post-tax pay in order to get the same £1,000 in your pension. Because you’re a higher-rate taxpayer, you can also claim back an additional 20pc – or £200 – from the taxman. This means that the £1,000 contribution has cost you £600 – exactly the same as in the net pay scheme.
• Salary sacrifice: If you receive your £1,000 personal pension contribution via salary sacrifice, your employer will reduce your salary by £1,000 and pay this into your pension as an employer contribution. That contribution is not subject to 40pc income tax, and neither you nor your employer will pay National Insurance on it either. In 2023/24, your employer saves £138 this way and you £20. The employer may choose to share some or all of this saving with you, but it doesn’t have to.

“One thing to bear in mind when considering salary sacrifice is the impact it might have if you’re ever made redundant. As your salary will be reduced, it is possible your redundancy entitlement will be reduced, too,” said Tom Selby, head of retirement policy at AJ Bell. “Taking less salary could also affect things like maternity and paternity pay, mortgage applications and some state allowances.”

Remember to claim higher tax relief

Hundreds of thousands of higher and additional-rate taxpayers fail to claim tax relief on their contributions every year – doing so can provide a real boost to your finances.

This will depend on how your contributions are made – those with net pay schemes won’t usually have to worry, but if your pension uses a salary sacrifice scheme or relief at source scheme then you might need to make a claim from HMRC. 

Higher earners who have missed out on tax relief above the 20pc basic rate can claim relief dating back four years.