Three million missing out on workplace pension contributions

Steve Webb, Director of Policy and External Communications, Royal London 

New analysis by mutual insurer Royal London has found that over three million people working for larger employers are failing to take up around £2bn a year which their employers have offered to contribute to their workplace pension schemes.

In many workplaces, workers pay a standard percentage of their wage into a pension and their employer pays in as well. But amongst larger employers in particular, valuable additional ‘matching’ contributions are available if an employee chooses to save beyond the minimum level. 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. Household name employers who offer to match additional pension contributions from their employees include Vodafone, Next, Bae Systems, Tesco and Royal Mail.

Royal London has undertaken analysis of the impact of missing out on ‘matching’ contributions based on the following information:

  • The number of people who work in larger firms
  • Typical levels of employer ‘matching’ contributions available
  • Estimated levels of take-up of ‘matching’ contributions.

Based on this data, Royal London has calculated that those who contribute only at the minimum rate to a workplace pension, or who do not take up the full match, are missing out on additional employer ‘matching’ contributions worth around £2bn each year.  Around 3.2 million workers are missing out on an average of around £650 per year each.

One firm – Nationwide – recently changed its pension policy to deal with this problem. Despite offering a generous additional ‘employer matched contribution’ for those who saved more than the minimum, only around one in 10 members of the scheme were taking full advantage. Nationwide switched to making the *maximum* contribution the standard for employees, leaving them free to opt for a lower contribution if they wished. Now more than eight in 10 members are benefiting from the maximum employer match[1].

Where an individual contributes £1 to a pension and receives standard rate tax relief, the cost to them is 80p. If the employer matches the full £1 contribution, this means that an 80p ‘investment’ by the worker generates £2 in the pension scheme.

It is estimated that someone on average earnings who chose at age 40 to take full advantage of an additional 3% employer matched contribution would have an income in retirement nearly £3,500 per year higher than someone who only contributed at the minimum level.This could make the difference between an income in retirement of £19,050 without the extra contributions and one of £22,500 for those who took up the full employer match.

Commenting, Royal London Director of Policy, Steve Webb said:

‘Millions of workers are missing out on buy-one, get-one-free money from their employer in the form of ‘matching’ pension contributions.  At a time when money is tight for many people 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.

‘Much more needs to be done to make workers aware of the money their employer will add to their pension if they are willing to contribute at a slightly higher level.   Employees need to find out if their employer offers additional matching pension contributions and give serious consideration to increasing their contributions if they can afford to so. Where the individual has other financial options, they may find it helpful to seek independent advice.’

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