Why auto-enrolment is only the start for pension saving

06 April 2023

7 minute read

We explore how pension auto-enrolment schemes work, but explain why you shouldn’t rely on them alone to offer you your dream retirement.

Who's it for? All investors

Remember the value of investments can fall as well as rise. You may not get back what you invest. We don’t offer personal financial advice so if you’re not sure about investing, seek independent advice.

What you’ll learn:

  • How auto-enrolment has encouraged 10 million more people to save for retirement.
  • Why the auto-enrolment minimums may not be enough to reach your financial goals.
  • How ISAs and other savings can also play a role in funding your retirement.

When there is pressure on your finances – or even when you are feeling flush – the last thing you probably want to think about is your retirement and how to fund it.

But the more you can afford to put away now – without damaging your financial wellbeing today – the greater the chance you have of achieving the retirement you hope to enjoy.

Not everyone is a self-starter with some individuals needing more encouragement than others to save for their golden years.

To kick-start a stronger saving habit, the Government introduced a pensions auto-enrolment programme in October 2012. This is where deductions are automatically taken from your salary and diverted into a workplace pension – though you are permitted to opt out of the scheme if you want.

The scheme has been hailed a success with about 10 million more people now saving for their retirement via a workplace pension, according to recent figures from The Pensions Regulator1.

Most people these days who are enrolled in a workplace scheme are put into defined contribution pensions. These are pensions where the sum you build up by the time you give up work depends on how much you and your employer put in, how well the investments perform and the charges incurred.

Under auto enrolment rules, you put money into a workplace pension scheme and so must your employer. There’s also tax relief on combined gross contributions of up to £60,000 every year for most people, which means everyone has their pot topped up automatically by 20%. This means if you and your employer pay in a total of £80, for example, HM Revenue & Customs will add £20.

A higher rate taxpayer claims an extra 20% relief via their tax return – though this relief essentially ends up in your pocket, not in your pension pot.

If you are in the 45% tax bracket you can claim an extra 25%. Be aware that if you are a higher earner the sums you are permitted to put in your pension may be reduced on a sliding scale to a lower limit of £4,000 a year if your threshold income (excluding pension contributions) is more than £200,000 a year and adjusted income (including personal and employer pension contributions) that takes you over £260,000 (in the 2023-24 tax year).  Find out more about your tax allowances.

Resist looking a pension gift horse in the mouth

To opt out of auto enrolment is like turning down free money. You’d miss out contributions from your employer and HM Revenue & Customs and also the potential growth on your money year after year.

Under auto enrolment rules the minimum your employer must contribute to your pension is 3% of a certain band of your earnings – and normally so long as you earn at least £10,000 a year. The lower contributions threshold for 2023-24 is £6,240 and upper limit £50,240. Of this band 5% is deducted from your pay, bringing the total contribution to 8%. As noted above, you can get tax relief on your own contribution. The method of this will depend on the type of pension scheme and how your employer chooses to operate the relief.

Ways of turbocharging your pot

Some employers may calculate the sums on a wider band or even pay a percentage of your whole salary. Others boost your pension in other ways. You might be offered matched or double contributions, which means the more you pay in, the more your employer adds on top – up to a set limit. All these extras can help you reach your retirement goals faster if they are available to you and you can afford the relevant contributions.

Self-employed have to work harder on pension building

If you are self-employed, you have to work a bit harder to build your retirement pot, as you have no employer adding to your pension. But you do get help from HM Revenue & Customs, with the same levels of tax relief on your contributions as employees.

Whatever your employment status, before you start cranking up your pension saving, be aware that you can’t get at the money you put away until at least age 55 (or 57 from 2028). You may decide that right now you could put that money to work more efficiently, such as to pay off expensive debt or for shorter term goals, such as saving for a deposit on a house.

If you are uncertain about what steps to take with your pension saving you should take independent financial advice. Generally, if you have got your nearer term goals under control then you could start boosting your pension.

Rules of thumb on how to reach your goals

You might wonder how much you need to salt away. There is no right answer, as it will depend on what you have to spare and your personal aspirations for your retirement lifestyle. Everyone is different.

But there are a few rules of thumb to guide you. One of the simplest, often used by financial advisers, and for those who want an income about two thirds of what they earned on average during their working life, is to take your age when you start your pension and halve it.

This figure provides the percentage of salary (before tax) you could consider putting into your pension from that point each year until retirement. For example, if you are 28, then you could think about putting 14% of your pay into your pension if you could afford it. If you are 40, you could consider contributing 20%. Remember that this figure includes any tops up from your employer and from HM Revenue & Customs.

There are no guarantees that this will get you to your final goal as this will depend on what happens to your investments over time and whether you keep up your contributions.

Your retirement funds can be made up of more than pensions

Don’t forget retirement saving is not just about pensions. You can take income from other savings and investments once you’ve given up work – such as your ISA or other savings. It’s just that pensions have the most generous tax perks available that make them an ideal foundation to help you to meet your retirement goals. Though remember tax rules can change – as can your own circumstances that could affect how much you can put in and the tax relief you would get on your contributions.

If you have cash to spare you can consider opening your own separate personal pension. You won’t receive employer contributions but you still get tax relief so long as you don’t exceed the annual contribution limit of £60,000 in total across all of your pensions.

Where your pension money is invested

How your money is invested will depend on what the provider offers and how you feel about investment risk. Typically the younger you are the more risk you might feel comfortable in taking with your investments to give them the chance of higher returns, though this is not guaranteed. Everyone’s idea of risk is individual to them, so you’ll find there is no one size fits all approach to pension investments.

If you are a confident investor you might consider a Self-Invested Personal Pension. This is a do-it-yourself type of personal pension that gives you a much bigger basket of investments to choose from. Find out more about SIPPs.

Whatever route you choose, always take time to check your pension saving is on track and that your funds are invested where you want them to be to help meet your long-term goals. If you are unsure about what to do about starting, reviewing or taking an income from your pension on retirement, seek financial advice.

Find more about planning to your retirement.

You may also be interested in

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.


Self-Invested Personal Pension (SIPP)

A tax-efficient way to save for retirement

Our award winning Self-Invested Personal Pension (Best SIPP award 2022 at the Shares Awards) is designed to help you prepare for retirement.

Let us help you build your retirement pot and make your own investment decisions.

Investment ISA

A simple and tax efficient way to start investing

Boost your savings by investing up to £20,000 in our Investment (Stocks & Shares) ISA per year completely tax-free.

If you've used your ISA allowance this tax year, you can open a regular Investment Account or transfer in another ISA to us.2