Martin Lewis: Employed aged under 22, or any age earning under £10,000? How to get a hidden pay rise

If you're under 22 or on a low income, a pension is probably the furthest thing from your mind, but what if I were to tell you there's a totally legal way, that doesn't need any negotiation, to make your employer pay you more money – possibly £1,000s over the years? Hopefully that piques your interest, and means you'll forgive me for not mentioning pensions in the blog title – but I wanted to ensure you read this.

Video: Why you should consider opting in

The easy way to start is by watching my new basic video explainer, which was part of my ITV Money Show pensions special (17 Feb '22), where I talk about how opting in and opting out works, then read on for the full details. For more pensions issues including how they're taxed, if you should consolidate and more, click the link to watch the full programme.

Embedded YouTube Video

Turn on subtitles by using the closed captions icon in the bottom right.

This is all about auto-enrolment, which you're NOT a part of

Employees who are aged between 22 and around 66ish (state pension age) who earn at least £10,000 a year are part of the pension auto-enrolment scheme. That is a law that means firms must automatically opt in their employees so that a part of their salary is paying into a private pension – a savings scheme to provide money for you in later life (aged 55+) on top of the state pension. In other words, they save into a pension by default.

Crucially, it also means as long as they don't opt out, the employer MUST also contribute to this pension fund – ON TOP OF THEIR SALARY.

You may be able to OPT IN to the same pension scheme

For those aged under 22 (or over state pension age), or earning under £10,000, the default setting is to be opted out of pension auto-enrolment. Yet you can CHOOSE to be a part of it, and in possibly the majority of cases, your firm can't refuse you, so I'm going to call this 'pension manual-enrolment'. This falls into two camps:

  1. Your employer MUST let you join and it MUST ADD contributions if...

    - You're aged 16 to 21 and earn above £6,240 a year.

    - You're aged between 66ish (state pension age) and 74 and earn above £6,240 (as like those under 22, once you've hit state pension age, the default setting for employees is that you're NOT opted in). 

    - You're aged 22 to 66ish (state pension age) and earn £6,240 to £10,000 a year. If you earn more than that, you will have been automatically opted in anyway.

    If you're in one of these categories, you can choose to get the same benefits as pension auto-enrolment, and your employer can't refuse. And that's my focus here, the info below will take you through it.

    Update April 2023: There is a law, in its final stages in parliament, which mean soon those aged 18 will automatically be opted in to the company pension, and contributions can start from the first £1.

  2. Your employer MUST let you join but NEEDN'T ADD contributions if…

    - You're aged 16 to 74 and earn under £6,240 a year.

    Though if you can, you may want to check with your employer whether if you save into your pension it'll match the contributions. If it says yes, then the rest of the info below applies to you. If not, contributing to a pension is always a useful option, but it's less of a 'no-brainer' than if your firm is adding cash.

If you can opt in, should you? (Spoiler alert – usually yes)

Understanding pension auto-enrolment, or in your case pension manual-enrolment, is a bit of a brain twister. You need to understand two facts...

  • EVERYONE WHO IS IN IT EFFECTIVELY GETS A PAY RISE… as your employer is giving you extra money you wouldn't have got otherwise, even though it's not immediately usable.

  • EVERYONE WHO IS IN IT GETS LESS TAKE-HOME PAY… to get the extra money, you are saving from your current salary; so your disposable income, the amount you can spend each month, is reduced.

This is usually different if your company gives you a final-salary pension, where the amount you get is based on the number of years you worked for it and your final salary.

So try to opt in, as if not, you're effectively giving up extra money from your employer.

Yet of course, if you're not opted in automatically because you're on a low income, rather than because you're under age, you may be laughing at the idea that you can afford to give up more disposable income. I understand that, it's a hard call, but it's worth doing the numbers. Not doing it means giving up extra cash that could help you in your retirement, and whether in future the state pension alone will be enough to live off is questionable.

This is about saving now, so your living standards don't plummet later.

Seriously? I'm under 22 – why should I think about retirement?

I'm sure some of you are thinking that. However, starting this now will be a major boon. As pension money is invested, it's always recommended to start early – as then it has longer to grow. Starting in, say, your teens would be exceptional, and gives you a chance of a really strong income in retirement.

Plus for some of you, you may well have a relatively decent amount of disposable income now, perhaps because you're living at home with parents and therefore have few bills or other costs to pay. In which case, take it from a man like me with hair starting to grey – getting a head start on your pension when it doesn't really impact you much will really work out well later on.

You can make your employer add up to 3% on top of your salary

Since April 2019, there are two sets of minimum payments that must be made into your pension pot if you qualify for the firm to put contributions in...

- The minimum your employer has to put in is 3% (on earnings between £6,240 and £50,270)
- The minimum total auto-enrolment contribution is 8% (that's the total that you and your employer together must put in).

So if your employer is only putting in the minimum 3%, your contribution will automatically be 5% to meet the minimum total – without you doing anything. However, as I'll explain in a moment, your contribution is from your pre-tax salary, so it actually costs you less than it sounds.

It's worth noting your employer may also have a much more generous scheme, in which case these minimums may be irrelevant. There are some rare cases where employers will double whatever you put in – it's worth finding out. Or your scheme could allow you to opt to put in more, or put in less and still get some contribution from your employer. Do check.

It costs as little as £40 to get £80 added to pension savings

In the 2023/24 tax year, on earnings over the standard £12,570 personal allowance, you'll pay the basic 20% rate of tax until your earnings hit £50,270. Above that, it's the higher 40% tax, unless you're a seriously high earner, above £125,140, when you hit the top 45% rate. (Figures differ for Scottish taxpayers).

Yet pension savings come from PRE-TAX salary, so putting £50 a month in your pension only reduces your pay packet by £40 (£30 for the rare under-22s who are higher 40% rate taxpayers).

Plus at the minimum level, if you put 5% in, your employer has to put 3% in. That means even with the minimum contribution, if you put in £50 a month, your employer would put in £30, so there's a total £80 a month added to your pension, but that only costs you £40 (£30 at higher rate).

Crucial pension maths

  Basic 20% tax payer Higher 40% tax payer
You contribute (pre-tax) £50/mth £50/mth
Employer adds +£30/mth +£30/mth
Total saved £80/mth £80/mth
Cost to you (amount take-home pay reduced by) £40/mth £30/mth

Over a year, at this level of saving you'd pay £480 (£360 higher rate), but your pension would have £960 added to it. That's unbeatable.

It is worth pointing out though, that for those who earn less than the personal allowance (currently £12,570/year) – including all those who have not been auto-enrolled due to a low salary – you may not get the same tax benefits, as you don't pay tax.

Whether you get the tax relief or not depends on how your employer has set up its pension contribution arrangement. There are two ways:

  1. Relief at source (better for you): Put simply, your employer takes your pension contribution from your salary after any tax is deducted. Your pension provider then automatically claims back the tax off the government at 20% - (whether you’ve paid it or not) and puts it in your pension.  So even though you’re a non-taxpayer you get the 20% tax relief.
  2. Or Net pay (worse for you): Here your employer takes your pension contribution before tax is deducted, which is a gain for most people, but as you don’t pay tax anyway, you don’t get a tax benefit.

So, ask your employer which method it uses. Yet if it is net pay - don’t let that put you off staying in the pension scheme, as you’re still getting the employer's contribution – which means £50/mth gets you £80/mth.

Is there anyone who definitely shouldn't be doing this?

If you really can't afford to contribute to your pension, you could consider lowering your contributions if the firm allows it and will still match it. Though if you can't afford to eat or have a roof over your head, of course that's a priority now, so a pension will have to wait. The other times I would say it's best to delay starting are if:

  • You've very expensive debts, eg, payday loans or a high 40% overdraft interest. Here it's likely worth clearing these before you start to contribute to your pension. See our Debt Help guide.

  • If you're near retirement and have little savings. There is a chance that having a bigger pension pot could reduce your benefits, but this is a rare scenario. See our 10-minute benefit check-up tool.

Aren't private pensions a waste of cash?

You often hear people, especially those currently near retirement age, swear about how their pension has massively underperformed. Well, that's simply not true. You may be surprised to read that no private pension has ever underperformed.

OK, I am playing a little with words here, but this all stems from a fundamental misunderstanding of what a private pension is. It's not a product. It can't underperform. It's just a special wrapper everyone is given by the Government with the huge advantage that you save from pre-tax salary.

The problem is that historically many people invested their pension savings in 'with-profits' funds, and these were often crap and many substantially underperformed. Yet don't blame the pension wrapper for what was put inside it.

These days, the choice of investment is much better, with lower charges and more transparency. Your firm's pension provider should give guidance on what your options are.

Much of the choice is about 'investment risk'. That sounds scary, but higher risk means you're aiming for fast growth, but accept the fact there's a bigger chance it may shrink. The younger you are, the more room you have to take some risk; as if it goes wrong, there's more time for things to even out.

More frequently asked questions

See the FAQs in my main auto-enrolment blog, including:

When can I take my pension money?
Isn't property better than a pension? 
Isn't a LISA a better way to save for retirement?

And please do let me know your thoughts below, especially if this has spurred you to take action on your pension.