The impact of matching pension contributions

There’s no better way for employees to turbo-charge their pensions than by making use of employer contribution matching.

Increasing contributions above auto-enrolment minimums over time is one of the best ways of improving the future financial resilience of your workforce.

While some employers stick to auto-enrolment minimums, offering to contribute more if your employees do can have a significant impact on how much they end up with at retirement.

In the current high inflation environment, it may be hard for individuals to find the extra cash. Offering a matching contribution basis will allow those who can afford to pay more the chance to boost their pension, without applying undue pressure to those who cannot afford to do so.

The impact of contribution matching

The power of compounding is well documented, and regularly contributing to a pension is a fantastic example of compounding in action.

Someone earning £25,000 a year who contributes 8% of their salary from age 22 to 65 could end up with a pension of more than £138,000 at retirement. This is with a 5% employee contribution and 3% from the employer, as specified under auto-enrolment minimums.

However, if the employer also contributed 5% (making it a 10% contribution), the value of that pension at retirement could increase by almost 24.6% to £172,000.

As members see the additional contributions being paid in each month and the impact it’s having, they may consider increasing their contributions further.

If employees increased their own contribution to 6% and the employer matched this increase, you could be looking at around £207,000 at retirement.

These are potentially huge increases for fairly small additional monthly contributions from both parties.

The figures in these examples are based on a starting salary of £25,000. Inflation is assumed to be 2.5% per year and investment growth of 5% per year. All figures are a guide, do not include salary increases and investment growth isn’t guaranteed. Unlike cash, investments fall as well as rise in value, so you could get back less than you invest.

Saving National Insurance and tax

One area where an employer can make significant savings is National Insurance (NI).

If you offer employees the chance to contribute using Salary Sacrifice (also known as Salary Exchange), these contributions will also be exempt from National insurance, both for the employee and employer.

With the rate of employer NI rising from 13.8% to 15.05% in April 2022, Salary Sacrifice looks even more appealing than before. Savings made on NI could be used to offset the cost of increasing contributions, or even shared with members.

Pension contributions using Salary Sacrifice can also be treated as an allowable expense to offset against corporation tax. Speak to an accountant to find out more.

It’s important to keep in mind that tax rules for both employers and employees can and do change. Any benefits depend on individual circumstances and could change in the future.

Getting the word out

Research carried out by HL in April 2022 showed that more than a quarter (28%) of people didn’t know how much they, or their employer, contributed to their pension.

Many people who could be benefiting from a valuable boost to their retirement income may not be aware of it.

If you already offer matched contributions and/or Salary Sacrifice, it’s vital that this is clearly and frequently communicated.