Martin Lewis has warned workers they risk missing out on a “salary boost” by failing to contribute to a pension.
In this week’s Money Show, the Money Saving Expert founder explained that pensions have two “superpowers” that make them an unbeatable savings tool. The first key advantage is tax relief, and the second is employer contributions.
Mr Lewis said: “The money you put into your pension is from pre-tax salary. So, this is a superpower. You get tax relief.”
He broke it down further: for a basic-rate taxpayer, putting £100 into a pension effectively only costs £80 because a 20% tax relief is applied upfront, either by reducing taxable income or through a top-up from HM Revenue and Customs (HMRC).
The benefits are even greater for higher earners. He said, “If you’re a higher 40% rate taxpayer, well then 40% tax would be taken off. So you’re getting £100, and it’s only costing you £60. If you’re lucky enough to be a top 45% rate taxpayer, well, you’re getting £100, and it’s only costing you £55.”
Unlike normal savings accounts, this tax relief means that pension contributions automatically receive a financial boost from the Government, something Mr Lewis called “absolutely crucial” for workers to understand.
The second major advantage, according to Mr Lewis, comes from employer contributions in workplace pensions. He said: “If you’re in a workplace pension, you’re automatically going to be opted in to getting a pension in most cases. You don’t choose it. You’re contributing to a pension and so is your employer, and that ‘so is your employer’ is crucially important.”
For a basic-rate taxpayer, this means that when they contribute £80 (which is topped up to £100 due to tax relief), an employer will typically add another £60. This results in a total pension investment of £160, effectively doubling the employee’s contribution.
For top-rate taxpayers, a £55 contribution can be turned into £160 – nearly tripling the original amount.
Mr Lewis said: “That is just completely unbeatable. So in a way, if you were not to do it, you’re giving up a pay rise. Your company has to put extra money in your pay packet. You’re giving it up.”
Mr Lewis also clarified who is automatically enrolled into a workplace pension. He said: “If you’re aged 22 to 66 and you earn over £10,000, that is when you’re automatically opted in.”
Workers earning between £6,240 and £10,000 can choose to opt in and still receive employer contributions. The same applies to those aged 16–21 or 67–74 if they earn above £6,240.
Encouraging young workers to take advantage of pension savings early, he said: “If you’re 19 and on a good whack, you know you’ve got no expenses. Probably you may not have kids at this point, you may not have a partner. It’s a time when you’ve got more disposable income. Get some money in your pension because then it’s got a long time to grow.”
One of Mr Lewis’ biggest warnings was about lowering contributions below the minimum threshold.
In most workplace pensions, the minimum total contribution is 8% of earnings between £6,240 and £50,270, with employees contributing at least 5% and employers at least 3%.
However, Mr Lewis warned: “If you go below the minimum, your employer does not have to do match contributions. So go below the minimum. You may not get anything.”
He strongly urged employees to check with their employer before reducing contributions. He added: “If they say no, then you’re giving away the entire 3% salary boost, which you really probably shouldn’t be thinking of doing.”
The Martin Lewis Money Show airs on Tuesdays at 8pm on ITV.
