Thanks to the advent of auto-enrolment, pensions have become arguably the easiest way to invest your money. 

In fact, if you are employed by a company, you must actively put in effort to not invest via your pension, by going through the opt out process. With this contribution squared away, your focus might shift to investing through other methods, such as an ISA.

But, depending on your investment goals, taking a closer look at your pension contributions could help your money go further than using a separate vehicle.  

As a base, when you’re auto enrolled in a pension, 4% of your salary will go towards contributions, while your employer contributes a minimum of 3% and the government provides 1% in tax relief.  

INCREASING PENSION CONTRIBUTIONS

However, you can still increase your own contribution to take full advantage of your pension. For the 2025/26 tax year, you can contribute up to £60,000 and benefit from tax relief. And depending on your employer, they may base their own contribution on how much you choose to put in. 

The method that companies use for this differs, but many companies will raise their percentage contribution if you choose to raise yours. It is important though to check your contract and policy to see if this is a worthwhile exercise.  

The other possible benefit of upping your pension rather than other investments is if your workplace participates in a salary sacrifice scheme. This is a contractual deal between an employee and employer where the employee agrees to give up a chunk of their salary in favour of a benefit (in this case, a pension). By giving up a chunk of their salary, they avoid this part of their income being subject to tax. This can be a valuable tool if you are on the edge of a tax bracket.  

For example, if you have a salary of £60,000 per year, around £10,000 of your income would be within the higher tax rate. Assuming your work has a salary sacrifice program, through auto enrolment, £2,400 of your salary would be put into your pension each year, leaving you with £57,600. The higher rate of taxable income begins at £50,271, so after the 40% tax, you’d receive £4,397 from the portion of your salary which sits in the higher tax bracket.  

But what if you instead put 8% in your pension? You’d have a contribution of £4,800 each year, and after the 40% tax, you’d receive £2,957 from that bracket. If you combine the amount you put into your pension with the amount you make after tax from the high income bracket in each of these examples, you’d have a total of £6,797 at 4% and £7,757 with 8%. If your employer matches your percentage increase, then the benefit would be even greater.  

REMEMBER THE LIMITATIONS

If your main investment goal is for retirement, this can be a sensible way to go about your saving. But pensions of course come with limitations. You can’t begin to withdraw from your private pension until you’re 55, and this age is set to rise to 57 in April 2028. When your goals include things like purchasing a home or paying for your child’s education, you will likely need access to your money much sooner.  

This is when vehicles like stocks and shares ISAs and Lifetime ISAs can be a useful tool. And with a Lifetime ISA, you still can get some benefits as the state provides a bonus top-up of up to £1,000 per year, though this wrapper comes with its own restrictions.  

ISAs can also have benefits when it comes to withdrawals. Anything you hold in an ISA is tax free, and you can withdraw it without eating into your annual income allowance, which is £12,570.  

Pensions allow you to withdraw 25% of the total amount tax free from the age of 55, but in most cases the remainder would be taxed as income.

THE BENEFITS OVER TIME

If someone simply rode out their auto-enrolment, on a £60,000 salary they would contribute £2,400 and their employer and tax break contributions would add another £2,400. In 30 years, if you had an annual return of 5% after charges, you would accumulate £332,903. You could take £83,226 of this tax free and, assuming you spread the rest of your pension over the coming years, you could have a tax rate of 20% on the rest.

If you took your £2,400 and invested it yourself with the same return over 30 years, you’d end up with £166,451. Even after factoring in the taxed amount, your returns are far better utilising a pension.  

Because of the different ways employers handle pensions, and because people have a variety of goals for their money, the decisions around pension contributions will differ depending on your personal circumstances. Ensure that you understand your company’s policies and when you plan to access your savings before making any changes and if in any doubt it is always worth seeking independent advice. 

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