The 8% pension rule: what is it and is it enough to retire on?

You are probably saving this amount into a pension each month without even realising with the 8% pensions rule. But what is it and is it enough to give you a comfortable retirement?

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About 22.6 million people – 79% of employees – contribute to a workplace pension, with the majority following the 8% pension rule. 

While many pension savers may not know what the 8% pension rule is, it is certainly one that you should know about. 

We explain what it is, how it can help you save for life after work, and whether it is enough to help you achieve a comfortable retirement.

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What is the 8% pension rule?

Under the government’s automatic enrolment initiative, a minimum of 8% of a worker’s qualifying earnings are added to a pension scheme. Employees are opted into this arrangement when they start a new job, when they are old enough (they must be at least 22) or when they start earning more than £10,000 a year. 

They can opt out of auto-enrolment, but due to inertia most employees don’t, and so therefore pay some of their salary into a pension every month.

The 8% contribution is made up of 3% from the employer, 4% from the employee, and 1% from tax relief. 

This minimum contribution is usually based on what’s known as “qualifying earnings”. For the 2023-24 tax year, this relates to the band of earnings between £6,240 and £50,270.

Say you earn £24,000 a year. Your qualifying earnings are calculated for the current tax year as £24,000 - £6,240 = £17,760 a year. Your employer would then contribute 3% of this amount to your pension (£532.80 a year), while you contribute 4% (£710.40) and the government tops it up with 1% tax relief (£177.60).

On a monthly basis, it means £118.40 is being put into your pension, with you, the employee, contributing half that amount.

Auto-enrolment has been hailed as a great success since its launch in 2012. Back then, just 47% of employees were saving in a workplace pension. The figure is now 79%.

Gail Izat, managing director for workplace pensions at Standard Life, said: “Over a decade on, auto-enrolment has clearly had huge benefits for the UK’s pension savers, helping to fill the gap created by the demise of defined benefit pension schemes and establishing retirement saving as the norm in workplaces across the country. 

“One of the biggest successes of auto-enrolment has been the low level of opt-outs, partly due to the rise of saving by inertia.”

However, this inertia - and lack of engagement - is a double-edged sword. While it’s great so many employees are saving for retirement, the vast majority aren’t aware they are only saving 8% of qualifying earnings. 

Contributing this amount of money into a pension each month may not be enough to achieve a decent retirement, especially if there are no other savings or income streams earmarked for later life.

Is saving 8% into a pension enough?

Most experts agree that contributing 8% into a pension is a good start, and over the course of a career can create a decent nest egg - but it may not be enough to secure the retirement of your dreams.

Standard Life has crunched the figures to show how increasing the figure to 12% can produce a pot worth 50% more. 

Take a 22-year-old earning £25,000. Her salary increases by 3.5% each year. The 8% minimum auto-enrolment contribution is paid into her workplace pension until she’s 66, and she builds up a pension worth £434,000. This is based on 5% investment growth and a 1% annual charge.

But say the 8% figure was increased to 12%. She would then amass a pot worth 50% more, at £651,000.

It may seem unrealistic paying in the bigger amount from age 22. So, let’s say she increased it later in life, when her earnings were higher. If she switched it to 12% at age 44, she would build a pension of £537,000 – nearly £100,000 more than if she’d just saved 8% the whole time.

“The single biggest thing that people can do to boost their chances of securing a decent fund for their retirement is raise their contributions as soon as they can to benefit from investment over a longer period,” said Izat.

Standard Life’s parent, Phoenix Group, recently published an auto-enrolment report looking at whether the minimum contribution should rise to 12%. The Living Wage Foundation has also launched the Living Pension target of 12%, which requires the employer to hike their contribution from 3% to 7%.

However, Ian Price, a pensions expert and director of Price Consultancy, urges caution around making it compulsory for employers - and employees - to pay in more money.

He tells MoneyWeek: “For a lot of people, they are seeing massive pressure on their income due to increased mortgage payments and rent hikes. Looking at the current economic climate, I would not be in favour of an increase in the minimum auto-enrolment level. There always has to be a balance as to what employers can afford without increasing costs so much that it starts to impact the business.”

How can I boost my pension?

There are lots of tips and tricks you can do to boost your pension. Just contributing an extra 1% into a pension - aka the 1% pension rule - will pay dividends in retirement.

Some experts say the 50% pension rule is a good rule of thumb. The idea is that when you start a pension, you save a percentage of your pre-tax salary equal to half your age.

So, if you started contributing to a pension at age 24, you would save 12% a year into your pension for the rest of your working life.

You may also like to bump up your pension contribution every time you get a pay rise. If you siphon off part or all of your pay rise into your nest egg, you won’t even notice a loss of take-home pay compared to your previous salary.

Whether you are getting paid a bonus this year, been given a generous cash gift or have some surplus savings, using that money to grow your pension is also worthwhile.

Paying in a one-off lump sum of £1,000 every five years could boost your pension by £23,000 when you retire.

Price has a few more tips: “The first thing to do is understand what you are already on track for via both your workplace pension scheme and the state pension. If you have a partner, look at what they are on track for too. If this is not enough then consider what additional money you can afford to put aside each month. I would also make sure if I am a higher-rate taxpayer [or additional-rate payer] I am claiming the additional tax relief.”

Bear in mind that some employers will pay in more to your pension if you increase your contribution, such as matching the amount up to a certain level. So, if you don’t raise your minimum 4% employee contribution, that could be like leaving extra money on the table. Ask your HR team for more details.  

Is the government going to change the auto-enrolment rules?

The government is looking at tweaking the rules around auto-enrolment, so that more people save into a pension, and a higher amount is paid in. 

For example, the initiative does not currently apply to workers aged 21 and under - but the government does have the power to introduce regulations to reduce the minimum age to 18.

It can also lower the minimum earnings threshold on which contributions are calculated, so that contributions are calculated on a larger proportion of earnings, from £6,240 a year to £1 a year.

It should become clearer next year whether the government decides to go ahead with these new laws.

However, it looks like the 8% rule will remain, at least for now. 

Ruth Emery
Contributing editor

Ruth is an award-winning financial journalist with more than 15 years' experience of working on national newspapers, websites and specialist magazines.

She is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. 

A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. 

Outside of work, she is a mum to two young children, while also serving as a magistrate and an NHS volunteer.