Not working 9 to 5? The overtime boost worth £125k to your pension

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• £200 a month of overtime pay directed towards your pension could lead to £125,000 more in retirement

With most UK adults currently under-saving for retirement, it’s never been more important for people to consider when and how they can top up their pension to maximise their retirement income. Small, regular contributions can build up over time and new analysis from Standard Life, part of Phoenix Group shows how people who are paid overtime could boost their eventual retirement pot by tens of thousands of pounds by putting some of their additional pay into their pension.

Since 2012 all employers have been required to enrol all eligible employees (those over 22 years old and earning over £10,000 a year) into a workplace pension. The current minimum contributions are 8% of an employee’s salary – 5% from the employee, and 3% from the employer. However, this usually discounts extra pay like bonuses and overtime. Some industries, like manufacturing and construction, routinely offer paid overtime at typically 1.5x the normal rate of pay, potentially creating a sizeable extra pool of earnings to dip into.

Standard Life analysis finds that someone who began working full-time with a salary of £25,000 a year and paid the minimum monthly AE contributions from the age of 22, could have a total retirement fund of £192,000 by the age of 66, allowing for 2% inflation over the period¹. However, someone who chose to contribute just £200 of overtime pay a month for the duration of their career on top of minimum contributions could build up as much as £317,000 by the age of 66 – £125,000 more. Someone who chose to contribute an additional £300 of overtime pay a month could potentially end up with an even bigger pot of £380,000 in today’s prices.

_{*assuming 3.50% salary growth per year, and 5% a year investment growth. Figures allow for 2% inflation. Annual Management Charge of 0.75% assumed. The figures are an illustration and are not guaranteed. Earning limits not applied.}

The calculations show that even a relatively modest extra pension contribution from overtime pay can make a significant difference in time, thanks to the power of compound investment growth.

Gail Izat, Managing Director for Workplace Pensions at Standard Life said: “While putting the minimum required into your workplace pension is a great way to start saving, for most people auto-enrolment minimums aren’t high enough to secure a decent standard of living in retirement. The best way to consistently boost your pot is to increase contributions from your basic pay, however if you’re struggling to manage the trade-off between long and short-term financial priorities contributing from overtime pay instead could make a real difference. People often underestimate the power of small, consistent savings over time and a little bit extra now can have a real positive impact on your future standard of living.

“Pensions are also incredibly tax efficient, so contributing overtime pay into a pension is also a great way of maximising the percentage of your pay you get to keep. This can be particularly valuable if overtime pay pushes you into a higher tax band. If in doubt, speak to your employer or pension provider.”

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Notes to editors

1 Calculations assume the following:

2 - Calculations are intended only for the sole purpose of providing an illustration regarding the projection of savings and pensions. They should not be used with the intention to give an accurate representation of real-world outcomes. Figures allow for 2% inflation.

About Standard Life 

• Standard Life is a brand that has been trusted to look after peoples’ life savings for nearly 200 years
• Today it proudly serves millions of customers who come to Standard Life directly, through advisers and through their employers’ pension scheme.
• Standard Life is part of Phoenix Group, the largest long-term savings and retirement business in the UK. We’re proud to be building on nearly 200 years of Standard Life heritage together.
• Our products include a variety of Pensions, Bonds and Retirement options to suit people’s needs, helping our customers to invest and save for their future. We’re proud to offer a leading range of sustainable and responsible investment options.
• We support our customers on their journey to and through retirement with comprehensive, easy-to-understand guidance so they can invest in the right way for their needs and plan a future they feel confident about.
• The value of investments can go down as well as up and may be worth less than originally invested.