How to Make the Most of Your Workplace Pension

One thing that really drives me crazy is when people leave money on the table at work. No, not literally. I haven’t seen physical money at work in years. I’m talking about contributions you could be getting from your employer and the government, simply by participating in your workplace pension. Shockingly, around 20% of employees in the UK are not enrolled in a workplace pension, and even amongst those who are, many fail to maximise their contributions and employer match.

Having money at your disposal isn’t just about wealth — it allows you to make smarter financial decisions, build security, and take advantage of opportunities as they arise. A workplace pension is one of the easiest ways to do this: it’s low effort, tax-efficient, and comes with contributions from your employer that you can’t afford to ignore. In this post, I’ll show you how to maximise your workplace pension, choose the right fund, minimise fees, and set yourself up for a long-term, financially secure future.

Having money enables you to make better financial decisions

This is where having an Emergency Fund comes at a great advantage – and is a good example of why having more money enables you to make better financial decisions, in a sort of positive feedback loop. I’d bet you good money that the 20% who opted out of the pension scheme don’t have an Emergency Fund – they need all the money they can get from their pay check.

A workplace pension requires a minimum contribution of 5% per month from you, the employee, and 3% per month from your employer, totalling 8%. Some employers will fully match your contributions up to a certain amount. So, by not enrolling in a workplace pension, you’re automatically taking a 3% pay cut – although this is money which can only be accessed once you reach age 55 (or 57 from 6th April 2028).

Are you maximising your workplace pension?

So far, we’ve only covered the obvious. The fact is that most employees (~80%) are enrolled in a workplace pension. Great. But are you paying into your pension up to the maximum your employer will match? Some employers will match you up to 5,10 or even 15%. Anything at 5% or higher is a seriously good offer, and you should be taking it without hesitation.

Also, remember that pension contributions are paid gross (before tax), so the government will top up your contributions by an additional 20%.

Let’s consider a situation where your employer only puts you on the minimum 5% + 3% contribution as standard. But you ask – and sneakily, it turns out they’re actually willing to match your pension up to 10%. This is very generous (probably better than what 99% of employees get) but it illustrates the point clearly.

If your take-home pay is £3000 per month after tax, you’ll pay £300 per month into your pension, your employer will pay £300 per month and the government will give you an additional £60. So, £660 per month. Compounded at 8% annual return, that’s approximately £1 million after 30 years.

However, if you only took the standard pension contribution, (5% contribution from you, plus 3% from them), you’d be paying £150 per month, your employer £90, and the government £30. So, £270 per month. Compounded at 8% annual return, that’s approximately £405,000 after 30 years.

You’ve lost out on £150 free money from your employer per month, plus £30 from the government. The result, after 30 years, is a pension pot which is worth less than half of what it would have been if you’d taken full advantage of the employer match.

Not maxing out your workplace pension will cost you tens, if not hundreds of thousands of pounds over your career. It’s a very expensive mistake.

Keep track of your pensions

The average job tenure in the UK is 3.7 years. Over an entire working career, this means many pension pots with multiple different pension providers. Do you know where all yours are? In the UK, around £31.1 billion is estimated to be lost, forgotten or unclaimed in pension pots. That’s 3.3 million pension pots in total, with an average value of £9,470. Make sure yours aren’t on this list.

In the case of a lost pension pot, you’ve not simply left money on the table, you’ve hidden money under the table and forgotten where you put it.

Fortunately, there are multiple ways to track down lost pensions, so all hope is not lost. My suggestion is to consolidate your pensions into one pot, so you can more easily keep track of your money. Again, there are services that will do this for you.

Choose the correct fund

Many pension providers will auto-enrol you in a sub-optimal fund that is probably too conservative, and potentially also actively managed with fees that are too high (as I found out with my workplace pension). As soon as you start a new job, find out if there are other funds your employer will pay into.

A broad-based, low-cost index fund like Vanguard FTSE All-World ETF (VWRP) is perfect. This will almost certainly outperform and have lower fees than the default fund your employer enrols you in.

For most of your career, you probably don’t want a fund that invests heavily into bonds – this is too conservative while you’re earning an income. Look for a fund which is weighted more heavily towards stocks (stocks will be the driving force behind growing your pension wealth, but will have greater volatility than bonds).

Bonds are lower risk with guaranteed income, and smooth the volatility of stocks – at the expense of lower returns. Only you can decide what proportion of bonds/ stocks you want to invest in, based on your personal risk tolerance.

Make sure the fees are low

You want to avoid having your pension invested in actively-managed funds with relatively high fees, and which are unlikely to outperform the market anyway. Passively-managed funds, with their lower fees, will give you greater returns over the long term.

For me, this meant moving my pension out of an actively managed fund with Aviva (I had previously combined my pension from my past employer), and into a passively managed fund with Vanguard.

Specifically, I moved it to the Vanguard FTSE All-World ETF (VWRP). This has an ongoing charge of 0.19%, plus a Vanguard account management fee which is capped at £375 per year. Aviva, meanwhile, charges 0.35% account management fee up to £500,000 (free thereafter), plus an additional ~0.3-1% fund fee. If I remember correctly, my fund fee was around 0.7% with Aviva (it was actively managed).

Aviva was charging me ~1.05% per year in fees, significantly higher than Vanguard. With £250,000 invested, that’s £2,625 per year in fees to Aviva, but only £850 to Vanguard. Plus, VWRP was outperforming Aviva’s fund consistently.

Understand the contribution limit

The most you can pay into your pensions each year and receive tax relief on is £60,000 (the annual allowance) or 100% of your gross relevant earnings, whichever is lower. This includes all contributions, from you, your employer and from the government. There are a few exceptions (i.e. if you have a very high income).

There’s no limit on the amount you can pay into a pension above the annual allowance – but you’ll be paying tax on your contributions, and your money will be locked away for many years/decades. At this point, you’d be better off paying into your ISA.

Forget about it

Once you’ve done all of the above, don’t fiddle with your pension. Leave it alone and it will take care of itself. A study by Fidelity found that, over the 10-year period from 2003 to 2013, the class of investors who performed best were those who forgot they had an account with Fidelity. The results were shared in this August 2014 podcast.*

Don’t tinker with your pension. Sit back and let it ride. Your consistent contributions (pound-cost averaging) and the market will do the work for you.

In summary

Make sure you’re enrolled in a workplace pension as an employee.
Get the full employer match on your contributions.
Keep track of your pensions and consolidate them all into one pot.
Choose a fund which tracks the stock market passively, and has low fees.
Invest with a low-fee provider. I suggest Vanguard.
Understand how much you can invest tax free.
Forget about it.

*For a long time, suggestions floated around this study that the class of investor who performed best was dead people. But upon some investigation, this seems to be an urban myth.

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