Whether to Contribute More to Pension or Not?

Introduction

In the UK, the minimum pension contribution is 8% evenly split between the employer and employee. Some employers give you the option to increase your pension, in my case up to 8%. Some people, however, do not understand why it's important to take advantage of this opportunity provided by their employer, as they believe that paying fewer pension contributions will result in higher net cash flow. The return on pension is even greater since, for example, if you max out your contributions at 8%, your employer will match that amount as well. Therefore, your pension is guaranteed to increase by 4%.


A Practical example.


A 4% pension contribution on a salary of £50k is £2k per year (your contribution alone), and with the employer's total contribution is £4k. You get a total of £8k if you contribute at the max of 8%. 

The net cash implication of not contributing to this additional pension is around £1k. If you contribute instead of receiving cash now, you will receive an additional £4k from your pension. 

 

The Good Part?


The £4k you're paying in this example is not just £4k every year, but interest as well. I have seen a 23% return on my pension in the past three years, which translates to an average annual return of 8%. Which means you will receive an additional £900 from your £4k in interest. Currently, I do not know of any investment in the UK that gives that much return apart from maybe real estate.

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