British workers are missing out on ‘buy one, get one free’ pension offer
We are all quick to take advantage of special offers at the supermarket, but millions of workers are missing out on what is effectively “buy one, get one free” money from their employer.
A leading insurer has calculated that around 3.2 million people who work for larger employers are failing to take up an average of around £650 a year each.
Staff pay a standard percentage of their wage into a pension, and their employer pays in as well. But among larger employers, in particular, valuable additional “matched” contributions are available if a worker chooses to save beyond the minimum level.
For example, Tesco operates a scheme where the basic pension contribution by workers is 4% of salary, matched by a 4% employer contribution. However, employees can increase their contributions at any time, and the retailer will match their payments up to a maximum of 7.5%.
So if a worker puts in this amount, the company will put in the same, giving a total of 15% of salary going into their pot. That 15% is what is widely regarded by experts as the amount needed to secure an adequate retirement.
Other big-name employers that offer to match additional pension contributions from their employees include Vodafone and BAE Systems.
"When pay rises may be limited, getting your employer to contribute more to pensions can be a cost-effective strategy"
With some schemes you get a pound-for-pound match from the employer. Others are more generous – for example, a company might put in £2 for every extra £1 you pay in.
“Where workers are unaware of this option, or choose not to take it up, they are in effect passing up on ‘buy-one, get-one free’ cash,” says Royal London, which has worked out that, between them, these people are missing out on around £2bn each year.
It’s worth remembering that when an individual contributes £1 to a pension and receives standard-rate tax relief from the government, the actual cost to the worker is only 80p. If the employer matches the full £1 contribution, this means that 80p “investment” by the worker generates £2 in the pension scheme.
Royal London estimates that a 40-year-old on average earnings, who chooses to take full advantage of an additional 3% employer-matched contribution, would have an income in retirement nearly £3,500 a year higher than someone who only contributed at the minimum level. This could make the difference between an income of £19,050 without the extra contributions, and one of £22,500 for those who took up the full employer match.
Of course, it all depends on whether staff are aware their employer is offering matched contributions.
Some companies will be better than others at publicising this. And it’s fair to say that some employers probably only introduced matched contributions, or improved the deal they were offering, because they were under pressure to make concessions to workers after closing their generous defined benefit pension scheme.
For example, Tesco prompted an outcry among staff two years ago when it decided to shut its defined benefit arrangement and replace it with a defined contribution one. The new “retirement savings plan” went live in late 2015, but the employee anger did, at least, have a positive outcome: it prompted the retailer to offer a higher rate of contributions.
Former pensions minister Steve Webb, who is now director of policy at Royal London, says: “At a time when money is tight for many and pay rises may be limited, getting your employer to contribute more to your pension can be a very cost-effective strategy.
“When individuals are thinking about where to put their money to get the best return, the chance to more than double your money through an employer contribution and tax relief from the government takes a lot of beating.”
In 2015, Nationwide building society made an innovative change to its staff pension scheme. Despite offering a generous additional employer-matched contribution for those who saved more than the minimum, fewer than one in 10 scheme members were paying more than the basic “core” rate of 4%.
So Nationwide decided to make a 7% employee contribution the default, with the extra 3% matched by the society pound-for-pound. On top of that, it upped its own core employer’s contribution to 13% (previously it was either 5% or 9%). So if an employee makes a 7% contribution, a total of 23% is paid into their pension pot.
Since the change, around 84% of staff have been making additional contributions.
Lots of household-name employers offer to match additional pension contributions from their employees:
• Royal Mail
Like Tesco, Royal Mail has prompted uproar among staff over plans to close its defined benefit scheme. In Royal Mail’s case, there is talk of a possible nationwide strike if the company fails to reach an agreement with unions. The company already has a defined contribution arrangement where the default position after 12 months is that the worker puts in 5% of their pay and Royal Mail puts in 8%. However, workers can elect to increase this to 6% and 9% respectively (or cut it to 4% and 7%). Royal Mail is proposing to increase the company contribution by 1% in each tier, up to a maximum of 10%.
Workers in the defined contribution scheme can contribute 1%, 3%, 4% or 5%-plus and receive an employer contribution of double this: ie, 2%/6%/8%/10%. So a worker contributing 5% of pay would get 10% from the company, to give a total of 15% going into their pot.
• Compass Group
Employees can choose to pay 3%, 4%, 5% or 6% of their salary into the scheme and get a pound-for-pound match from Compass – ie, someone paying in 6% gets 6% from the company, giving a total of 12%.
• InterContinental Hotels Group
This is another company that has shut its defined benefit arrangement. How much people get depends on their employee grade. Employees can put in between 3% and 5% of pay, and the company will add one-and-a-half times as much – so you put in 5% and the company will chip in 7.5%. However, those higher up the corporate ladder get more: executive directors can pay in between 3% and 7.5% of pay, and the company will chip in four times as much – ie, up to 30% of pay.
• BAE Systems
Here, the core contributions are 4% from the worker and 6% from the company, but if the employee elects to puts in 5%, they will get 7% from BAE, and if they put in 6%, their employer will chip in 8%.
Employees elect to pay in 3% or 5% of salary, which is matched by the company.
Three other ways to top-up
1. Additional voluntary contributions
AVCs are the extra contributions you can make towards your pension over and above the standard rates that you and your company pay in, writes Patrick Collinson. Some companies offer to partly match extra payments you make into your pension, and if so you’d be a fool not to take them.
A basic-rate taxpayer who pays £50 a month into AVCs sees only £40 come off their pay packet, while for a higher-rate taxpayer, putting in £100 a month costs just £60. For the few companies that offer to 50% match AVC payments by employees, that £40 a month means £75 going into a pension, while for the higher-rate taxpayer the £60 results in £150. It’s one of the no-brainers of the pension world. Note that the maximum anyone can pay into a pension and receive tax relief on is £40,000 a year.
2. Lifetime Isa
Launched in April, this lets you save tax free for either a property or retirement – the crucial difference to standard Isas is you also get a government bonus equal to 25% of everything you save. It will be yours to keep either when you buy a property or reach 60.
The maximum amount you can save into the Isa each year is £4,000 – so the government will give you a £1,000 bonus on that amount. You can open the account any time between the ages of 18 and 40 and earn a bonus each year until you reach 50.
3. Added years
You must pay national insurance for 35 years to qualify for the full new state pension of £159.55 a week. If you have fewer qualifying years your pension entitlement is proportionately lower. For example, if you have 23 years of contributions then you’d be entitled to two-thirds of the full pension.
But you can fill in some gaps in your NI record by making voluntary contributions now, though you can generally only go back to fill gaps over the past six years. The government has a guide to making voluntary contributions.