Most people undercontribute to their pension for decades, then panic in their 50s. Here's how workplace and personal pensions work, how much you actually need, and how to calculate your gap.
Pension confusion is near-universal. Most people know they should contribute more; few know exactly how much, where it goes, or what they'll end up with. Here's the complete picture.
Defined Contribution (DC): The most common type. You and your employer pay money into a pot which is invested. What you get at retirement depends on how much was contributed and how the investments performed. No guarantees on the final amount.
Defined Benefit (DB): Primarily public sector. Your employer guarantees a specific income in retirement, usually based on final salary or career average salary × years worked. Rare in the private sector now.
Since 2018, employers must automatically enrol eligible workers (earning over £10,000/year, aged 22–66) into a workplace pension. The minimum total contribution is 8% of qualifying earnings — at least 3% from the employer and 5% from the employee (including tax relief).
Important: the 8% is calculated on qualifying earnings, not total salary. This makes it lower than the headline percentage suggests for lower earners.
Pension contributions receive tax relief — meaning HMRC effectively subsidises your saving. For every £80 you contribute as a basic-rate taxpayer, the government adds £20, so £100 goes into the pension.
Higher and additional rate taxpayers must claim the extra relief via self-assessment — it isn't applied automatically.
The rule of thumb used by many financial advisers: halve your age at the point you start contributing, and that's the percentage of your salary you should contribute (employer and employee combined).
These are rough guides. The actual calculation depends on your target retirement income, expected retirement age, existing savings, and state pension entitlement.
The full new State Pension in 2024/25 is £221.20/week (£11,502/year). You need 35 qualifying National Insurance years for the full amount, and at least 10 years for any state pension.
Check your state pension forecast at the government's "Check your State Pension forecast" service. Your workplace/personal pension needs to provide the rest of your target retirement income beyond this.
If the required return is unrealistic (above 8–9%), you need to either increase contributions, extend your working years, or reduce your target income. The retirement calculator shows exactly how these levers interact.