The value of workplace pensions has been underlined in a new report that reveals that an additional 2% contribution from an employer can leave you £115,000 better off in retirement.

According to analysis by Standard Life, if you started working for a company on a salary of £25,000 a year and paid 5% of your salary into a pension, and your employer contributed 3% from the age of 22, you could potentially build a retirement pot of £459,000 by age 66.

However, if your employer paid an extra 2% in pension contributions then you’d build a £574,000 retirement fund. These calculations assume £25,000 starting salary, 3.5% salary growth a year, 5% a year investment growth, and an annual management charge of 0.75%.

The difference higher employer contributions can make

Employer contribution3%4%5%6%7%8%9%10%
Retirement fund at 66*£459,000£517,000£574,000£632,000£689,000£747,000£804,000£862,000
Increase over standard amount£0£58,000£115,000£173,000£230,000£288,000£345,000£403,000

Source: Standard Life

*The calculations assume £25,000 starting salary, 3.5% salary growth a year, 5% a year investment growth, and an annual management charge of 0.75%.

Standard Life also found that if a company paid 3% more in pension contributions, so a total of 6%, then the difference would be £173,000, whereas if an employer paid 10% on a £25,000 annual salary, a pension pot would potentially grow by £403,000, reaching a total of £862,000 by retirement age.

The research highlights that while most people consider salary to be one of the major factors when deciding whether to take a job, more people should look at the value employer pension contributions can add. The amount that employers pay into a workplace pension can vary widely.

Dean Butler, managing director for direct retail at Standard Life, said: “Workplace pension packages can massively differ, and it’s therefore important to understand what your employer is offering when deciding whether to start a new job.”

“Our analysis shows that even a small increase in monthly pension contributions from your employer can have an extremely significant impact over the course of a career.

“Of course, there are many factors to take into account when accepting a job offer, including salary, but the full benefits package should be considered as part of the decision-making process. It’s worth taking time to understand the short and long-term impact on both your monthly income and pension savings, so you can weigh up what’s best for your individual circumstances.”

Workplace defined contribution pensions

If you’re paying into a workplace pension, this means that your contributions are invested, and the amount you receive when you retire is based on how much you and your employer have paid into the pot, as well as investment performance. Chances are that, unless you work in the public sector, your workplace pension is a defined contribution scheme. Read more about this type of workplace pension in our article Workplace pensions explained and What is a defined contribution pension?

A defined contribution workplace pension doesn’t offer a guaranteed income in retirement, unlike defined benefit (final salary) schemes. However, the hope is that over the years, you’ll benefit from employer contributions alongside investment growth and build up enough in your pension to provide for a comfortable retirement. Find out more in our guide How much should I save for retirement?