What is the minimum pension contribution?

Understanding minimum pension contribution, and knowing what you want yours to be, is important if you want to live comfortably in retirement. If you’re an employee, enrolling in your workplace pension scheme means your employer is responsible for facilitating contributions on your behalf. On this page, you’ll learn about minimum pension contributions, what GMP is, how much you could claim from your state pension and if there’s a way to increase the amount you could receive upon retirement.

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The rundown
  • The minimum pension contributions you make will depend on the pension scheme you’re in, but in most cases, it will be a percentage of your salary, and your employer will also make a contribution
  • The state pension is a regular payment the government gives you when you reach state pension age
  • You’ll need to work and make National Insurance contributions for at least 10 years to claim a state pension, and if you wish to claim your full pension of £175.20 a week, you’ll need to work for 35 years

What is the minimum pension contribution?

When you enrol in a workplace pension scheme, by law, there is a set minimum amount that you’ll need to contribute. The UK’s average minimum contribution increased on the 6th April 2019, to a minimum of 8% of an employee’s qualifying earnings

The calculation for contributions made after the 6th April 2019 are as follows:

Employer minimum contribution Employee contribution Tax relief on employee contributions Total minimum contribution
3% 4% 1% 8%

An example of minimum pension contribution

The amount you put into your pension depends on the type of workplace pension scheme you’re in, and whether you’ve automatically enrolled in a workplace pension or you’ve voluntarily opted in. Minimum pension contributions can also vary per scheme. 

For example, if you’re in a defined pension scheme, you’ll have to pay a minimum of £60 per payday. Like most defined pension schemes, your employer will also contribute, and the government will offer tax relief. In this example, your employer puts £20 into your pot, and you’ll get £10 as tax relief, meaning a total of £90 will go into your pension pot.

What is the state pension?

The state pension is the regular payment you get from the government when you reach state pension age. Your state pension age depends on when you were born, and you can use the government’s state pension age calculator to find out your exact retirement age. 

Your state pension doesn’t depend on minimum contributions, but it does depend on how many National Insurance qualifying years you work for.

A new system, known as the flat-rate state pension, was introduced on the 6th April 2016. The government designed this to make pensions easier to understand. The flat-rate state pension applies if you reach your pension age on or after the 6th April 2016. If you’ve already reached your state pension age, you won’t be affected by this new system, and you’ll continue receiving your state pension under the previous system. 

You won’t get your pension automatically once you reach retirement age, as it’s up to you to claim it from the government. You’ll receive a letter from the Government’s Pension Service two to four months before you reach state pension age, which will tell you what you need to do to claim your pension. There are three ways to claim your state pension, which are to:

  1. Fill in a claim form online
  2. Call the Working, jobs and pensions department on 0800 731 7898 
  3. Download a claim form from the government website

How much state pension will I get?

The amount of state pension you’ll receive will depend on how many qualifying years of National Insurance contributions you’ve made, and how many years you’ve worked for

Under the state pension rules implemented on the 6th April 2016, you’ll need a minimum of 10 years of service before you can receive your pension. These 10 years of service don’t have to be consecutive. Once you reach this, you’ll receive 10/35th of the maximum state pension, which is currently £175.20 per week. That means if you’ve worked for 10 years, you’ll be entitled to a state pension of about £50 per week. If you wish to earn the full £175.20 per week, you’ll need to have worked for 35 years.

Can I increase my state pension?

If you’re still working, you can defer your basic state pension, which can help you earn a higher pension later, but this only works if you don’t claim your basic pension when you reach retirement age. 

If you have savings you could use, you might also want to consider paying for any National Insurance qualifying years you may have missed. Doing so means you’ll pay a lump sum now, essentially buying a higher state pension for later, when you retire.

What is GMP?

If you were a public sector employee and a member of a defined pension scheme between 1978 and 1997, you might be entitled to a guaranteed minimum pension (GMP).

GMP is a defined benefit, or a specific pension amount, and is payable once you’ve reached the age of retirement. HM Revenue and Customs (HMRC) calculate the amount payable without considering any investments you may have. There are three parts to a retirement fund policy for a GMP, which are:

  1. Non-reserved funds: These funds are contributions you and your employer make into your original pension scheme.
  2. Reserved funds: These funds are put aside to cover the cost of GMP from the start date of your policy. Because the scheme you were previously a member of is contracted out of the State Earnings Related Pension Scheme (SERPS), a GMP is essentially the minimum pension you need. The minimum pension from your previous scheme will transfer to your new policy.
  3. Reference scheme test funds: These funds are related to contributions made after the 5th April 1997 under a previously contracted pension scheme. These funds are continued and kept separate when you transfer your benefits to another policy. 

GMP is paid as an annuity and is calculated on the date you stop working.

How is guaranteed minimum pension calculated?

You can calculate a guaranteed minimum pension (GMP) manually yourself or through the government’s GMP checker

To manually calculate GMP, you’ll need to know which accrual rate you’ll be using. The accrual rate for any GMP earned before the 6th April 1988 is 25% and 20% for any GMP you earn after that date. 

To calculate GMP earned before the 6th April 1988, you’ll need to know the total number of years you worked before the 6th April 1988, and multiply that by 25%, then divide it by 52. The same goes for calculating GMP after the 6th April 1988: you just replace 25% with 20%.

What other options do I have for saving for retirement?

There are a few other ways you can save for your retirement. You might want to consider individual savings accounts (ISAs), which offer a tax-free way to save. You can save up to a maximum of £20,000 per tax year (traditionally 6th April to 5th April), and you can choose from different types of ISA.

Another way to save is through investing, although this comes with additional risk. Investing in stocks is considered a long-term strategy that can be very profitable, but your returns aren’t guaranteed, and you could lose all your money.

A safer way to save for retirement is with a traditional savings account. Many savings accounts, such as fixed rate bonds, offer competitive interest rates. As the Financial Services Compensation Scheme (FSCS) protects deposits made into savings accounts provided by UK-regulated banks, you won’t risk losing your money. 

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