UK households are being encouraged to make a straightforward adjustment to their pension contributions that could potentially add over £134,000 to their final retirement pot. The advice follows a major new analysis from Standard Life, part of Phoenix Group, which highlights the dual benefit of using additional earnings like overtime to bolster long-term savings while managing tax exposure.
The Power of Redirecting Extra Income
The core finding of the Standard Life research is that money earned beyond what is needed for essential living costs can be strategically used for more than just immediate spending. By channelling additional pay, such as regular overtime earnings, into a pension scheme, individuals can substantially grow their retirement fund in a tax-efficient manner. This approach becomes particularly pertinent as frozen income tax thresholds mean more people risk being pushed into higher tax bands as their earnings rise.
Significant Long-Term Gains from Modest Contributions
The study provides clear projections to illustrate the potential impact. It models a person who begins full-time work at age 22 with a £25,000 annual salary, making only the minimum auto-enrolment contributions. By age 68, accounting for 2% inflation, their pension pot would be worth approximately £210,000.
However, the figures change dramatically with extra contributions from overtime:
- Adding £100 per month from overtime could result in a fund of £277,000 at retirement—an increase of £67,000.
- Contributing £200 of overtime pay monthly throughout a career could build a pot of £344,000.
- Increasing that to £300 per month could see the total grow to around £411,000 in today's prices.
Critically, the benefit isn't only for those who work overtime consistently for decades. The analysis shows that even a limited period of extra contributions can yield a major difference. Paying an additional £200 a month between the ages of 30 and 45 could boost a pension by £52,000, resulting in a total of £262,000 when adjusted for inflation.
Expert Insight on Tax Efficiency and Future Planning
Gail Izat, Managing Director for Workplace Pensions at Standard Life, emphasised the smart financial planning behind the strategy. "With income tax thresholds potentially being frozen for longer, rising earnings could push many more people into higher tax bands," she stated. "Redirecting additional pay like overtime into your pension is a smart way to reduce that impact while boosting your long-term savings."
Ms Izat further explained the practical advantages, noting, "Adding extra contributions from overtime or other additional income can be a practical, budget-friendly way to strengthen your financial future - and because pensions are tax-efficient, these contributions can help you keep more of your income." She concluded by advising anyone uncertain about their personal situation to seek guidance from their employer or pension provider.
The message from the study is clear: for those with the capacity to do so, treating a pension as a destination for surplus earnings, rather than relying solely on mandatory contributions, can transform retirement prospects. This simple change leverages existing work patterns to build a more secure financial future.
