Share
It could be tempting to stop paying into your workplace pension, especially when you have to make difficult choices about your finances. But there are a number of important benefits you could lose if you choose to opt out of your workplace pension scheme.
Eight reasons why it’s worth paying into your workplace pension
1. Your employer pays in too
Pensions are a form of deferred pay. They are a bit like a bank account for when you stop working, money you can spend on whatever you want, when you’ve retired. You don’t always have to stop working to take out some of your pension money. And not only does your employer pay you a wage today but they also contribute to your pension so you have money in retirement too.
The amount your employer will put in varies. The minimum amount they’re required to contribute by law is 3%, but many employers go further than this. If you opt out of the workplace pension, it’s like turning down free money, because your employer can stop paying in as well.
2. You get help from the government through tax relief
Tax relief is the top-up to your pension that you receive from the government. To encourage people to save for their retirement the government offers tax relief on pension contributions. This typically means that some of the money that would have gone to the government as tax goes into your pension instead.
Pension tax relief is one of the major benefits of saving into a pension. For example, basic-rate taxpayers can contribute £100 to their pension for just £80. Similarly, if you pay tax at 40%, that £100 pension contribution will only cost you £60.*
If you want to pay very large pension contributions and/or have income of £260,000 or above, see our guide on Pension allowances explained . Taking financial advice can be invaluable in these situations too.
*Different rates of income tax apply if you live in Scotland.
3. Your employer might pay more in if you do
Some employers will pay more into your pension if you pay more in too. This is called employer matching. It means that your employer will match your pension contributions, £ for £, up to a certain limit. It’s worth checking if your employer offers this.
The minimum amount that currently goes into your workplace pension through automatic enrolment is a total of 8% of your salary. 3% of your salary is paid by your employer, 4% comes from you and 1% from the government as tax relief if you are a basic rate taxpayer. But your employer might match your contributions to a certain limit. For example, if you pay 6% instead of 4% then they will also pay 6%. But you wouldn’t be paying in the whole 6%, as some of that would come from the government as tax relief. So instead of 8% of your salary going into your pension, 12% would go into your pension every month.
This isn’t as expensive as you might think. For example, if you pay £80 a month, the government tops that up to £100. Your employer pays in £100 and so a total of £200 a month goes your pension. But if you agree to do matching, then you pay £120 a month, the government adds £30, and your employer pays £150. This means that a total of £300 goes into the pension. But it’s only cost you an extra £40 for that extra £100.
It’s worth asking your employer if they offer this benefit – it could make a real difference to your pension.
4. Your pension grows over time
The money you pay into your pension is invested. With defined contribution workplace pensions, your pension contributions are automatically invested in the ‘default fund’, unless you actively decide to put them somewhere else. This means that your money is invested in a fund that’s suitable for most of the members of the pension, without you having to choose one.
You can choose to move your pension money to a different fund, but most people keep their workplace pension savings in the default fund. If you do decide to move your pension money, then it's important to think about how much risk you're comfortable taking. Generally, higher risk investments can help your money grow more in value than lower risk investments, but there's also a greater chance of losing money. It's important to understand that the value of all investments, even lower risk ones, can go down as well as up, and you could get back less than you paid into your pension.
But it’s important to think about how far away you are from retirement too. You might want to take more risk when you are younger as you won’t be able to access your pension for many years.
The sooner you start saving into a pension, the better. This is due to something called compound interest. This is just the magic of time. Any growth your investments make are invested too. So there is the opportunity for growth, not just on your original investment but also on those reinvested returns. You aren’t taxed on any growth while it is growing inside your pension.
However, it’s never too late to start saving into a pension.
5. You get access to a tax-free lump sum
You can currently take money out of your pension when you are 55. This is increasing to 57 in April 2028. You’re entitled to take up to 25% of your total retirement savings tax free up to a current maximum of £268,275. If you have a defined contribution pension then you can take your savings all in one go or as a series of smaller amounts, with 25% of each amount taken being tax free.
6. Your State Pension probably won’t be enough on its own
The State Pension is a payment from the government that people are entitled to once they reach State Pension age. For the tax year 2025 to 2026, the maximum State Pension you can receive is £12,014.12 for the year.
An organisation called Pensions UK has worked with independent researchers to look at the kind of things people say they want in retirement, and how much that could cost. They’ve created three different lifestyles – minimum, moderate and comfortable. These are called the Retirement Living Standards. For example, to have the minimum lifestyle it’s estimated that a single person needs £13,400 a year. That’s after tax on any pensions has been paid and it presumes that you don’t have a mortgage or rent to pay in retirement. A minimum lifestyle would mean you could spend £55 a week on food shopping, £12 a month on takeaways, a week long UK holiday and to give £20 for each birthday and Christmas present. But you wouldn’t be able to afford a car.
This means that even if you receive the full State Pension, it won’t be enough for the minimum lifestyle. Saving more into your pension means a better retirement.
7. Your pension can be paid to your loved ones if you die
The main aim of a pension is to provide you with something to live on when you’re retired. But on your death, you can usually leave any money in your defined contribution pension pot to whoever you like. To make sure your money goes to the right person, you should let your pension provider know who you would like to receive your pension on your death. This can be one person or more than one and it doesn’t have to be a family member.
But there may be some tax to pay on this. You can find out more information on what happens to your pension when you die here.
8. You’ll have more choice over when to retire
Ultimately, the purpose of pensions is to replace your wage when you’re ready to stop work. The more you have in your pension, the more choice you have about when you can afford to retire.
