3 pension tweaks could add up to £243,200 to pot for average earners

As the state pension rises an inflation-beating 4.1% this week, interactive investor, the second-largest investment platform for private investors and leading flat-fee platform, releases new calculations which reveal that average earners could boost their retirement savings by £243,200 with three simple steps.

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While the full state pension has uprated £470 to £11,973 a year, it still lags the amount needed for a basic retirement income. It’s therefore vital to make the most of your own pension savings, including your workplace pension and any personal provision, such as a self-invested personal pension (SIPP).

But first - how much are you really paying? 'Dare to compare' your fees

Camilla Esmund, senior manager at interactive investor, says: “One of the key ways investors can boost their retirement savings is by checking how much they are paying in fees, and to make sure they are not overpaying.

“While at interactive investor, we feel like we talk a lot about charges, and are proud of our transparent monthly flat subscription fee, our research consistently shows that many retail investors don’t know how much their annual pension charges are.

“It can be disheartening to integrate good habits, stick to your investment strategy for the long term and see the fruits of compounding take effect over time, only for your growing pot to be eaten away in unnecessary fees. Over decades, the differences can add up to tens of thousands of pounds. Importantly, paying over the odds means less wealth for you to enjoy down the line."

interactive investor is urging investors to ‘dare to compare’ how much they are paying in fees, and launched a new comparison tool linked here.

Key points:

• Moving to an employer that pays 5% into your pension rather than 3% could boost your workplace pension by £116,700 by retirement, assuming you earn £35,000. This figure increases to £197,700 and £328,200, for those earning £60,000 and £100,000, respectively
• Using salary sacrifice to make pension payments and reinvesting the tax saving into a SIPP or workplace pension could increase your retirement wealth by between £15,800 to £27,700
• Investing £50 of a pay rise into a SIPP or workplace pension could boost your pension wealth by £98,900 by retirement
• Together, these three tweaks could add up to £243,200 to your pension for an average earner on a salary of £35,000.

1) Moving to an employer that pays in 5% rather than 3% 

Many employers pay the statutory minimum of 3% into your workplace pension, but some are more generous. By moving to an employer that contributes more than the minimum, you could boost your retirement savings by tens of thousands of pounds.

Someone earning £35,000 who moves to an employer with a 5% employer pension contribution could accrue an extra £116,700 by retirement. Meanwhile, people earning £60,000 or £100,000 could increase their pension by £197,700 or £328,200, respectively. This assumes 5% investment growth net of fees and that contributions rise 2% per year in line with expected wage inflation.

2) Using salary sacrifice and reinvesting the tax saving

Salary sacrifice is one of the simplest ways to put more money in your pocket at no extra cost. It works by you giving up some of your pay in exchange for a pension contribution. While most pension contributions help you to save income tax, with salary sacrifice, you can also save national insurance (NI). That’s because your pension contribution is no longer part of your gross salary, which increases your take-home pay.

Salary sacrifice is a particularly great deal for basic-rate taxpayers who can save even more than those in the higher tax brackets. They can save £8 in NI for every £100 they contribute to their pension versus £2 for anyone earning above £50,270. 

Paying this additional take-home pay into your pension can improve your retirement savings by thousands. Someone earning £35,000, contributing 5% of their pay to their workplace pension and directing the £12 monthly NI saving to their pension – either a workplace scheme or a SIPP - could increase their pot by £27,600 over 40 years.

3) Investing £50 of pay rise in your pension each month

Harnessing the power of investment compounding can supercharge even modest pension contributions. 

Someone paying an additional £50 to their pension each month for 40 years would boost their retirement wealth by £98,900, assuming 5% investment growth and that they increased their total contribution by 2% each year.

Furthermore, 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.

Assuming you have maxed out your employer’s pension contributions, you have options here. You can either jack up contributions to your workplace scheme or pay into something separate, like a SIPP. 

Using a SIPP can be a great option if you want to manage your own investments or if you want more flexibility about how much to contribute each month.

Assumptions: calculations based on 40 years of contributions, assuming 5% annual investment growth net of fees; employer contributions are based on full salary; salary sacrifice assumes reinvested NI saving in pension with 20% tax relief; investing part of pay rise assumes £50 increased contribution which is then increased 2% each year in line with inflation.

*Note: higher and additional-rate taxpayers can claim extra tax back on personal pension contributions via self-assessment.

Camilla Esmund, senior manager at interactive investor, says: “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, says: “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.

“And the tax advantages of salary sacrifice aren’t reserved solely for employees. By lowering your salary and directing the equivalent amount into your pension, companies can pay less employer NI. From 6 April 2025, the rate of employer NI increased from 13.8% to 15%, and salary sacrifice is a useful way to soften at least some of the impact of this tax raid. 

“Higher earners considering upping your pension contributions should check if you’re owed a tax rebate as payments into a SIPP and some workplace pensions only attract 20% upfront relief automatically. You’ll have to claim the remaining 20% or 25% through your tax return or by writing to HMRC. Just make sure that you remember to claim. Thousands of people fail to every year and forgo what is essentially free money. Thankfully you can backdate claims for pension tax relief by up to four years.”