The power of 1%: how small pension increases can make a big difference

Most people know they should be saving more for retirement. But actually increasing pension contributions can feel surprisingly hard when there are more immediate costs like rent and bills to pay, and maybe a holiday you’ve been saving up for. 

Recent PensionBee research highlights another challenge. Nearly a third of people aren’t aware of the tax benefits that come with making pension contributions. And almost nine-in-ten don’t know the rate of tax relief they’re eligible to get. 

That matters because tax relief is one of the most valuable incentives available to UK savers. It means the government effectively tops up your pension savings. Yet many people miss out simply because they don’t know how it works.

If this sounds familiar, you’re not alone. But there may be a simpler way to make progress without it feeling like a sacrifice.

Increasing your pension contributions by just 1% of your salary could make more of a difference than you might expect. And understanding how tax relief works can help you feel more confident about taking that step.

Why increasing contributions feels so hard

Behavioural research shows people tend to feel losses more strongly than gains. Psychologists call this loss aversion. 

We also tend to prioritise present income over future benefits. A smaller amount of money now can feel more valuable than a larger amount later.

Savings accounts often feel easier to understand. They’re accessible and familiar, and the benefits are immediate. Pensions can feel more complex and distant. According to PensionBee’s research, 42% of savers admit that they don’t feel like engaging with their pensions, which includes checking their balance and making contributions, because it’s too complex.

But there are ways to make increasing contributions feel easier.

What does 1% actually mean in practice?

A 1% increase can sound abstract, so it helps to translate it into everyday numbers.

First, it's worth understanding how tax relief works. Most UK taxpayers get tax relief on their personal pension contributions, which means the government effectively adds money to your pension pot. Basic rate taxpayers usually get a 25% top up - HMRC adds £25 for every £100 you pay into your pension.

This means you don't pay the full cost of your pension contribution yourself.

If you earn £25,000 a year, a 1% increase means an extra £21 per month going into your pension. Thanks to tax relief, it costs you less than that - around £17 per month from your pay (if you're a basic rate taxpayer).

For someone earning £40,000, it's £33 per month into your pension, costing you around £27 after tax relief.

For many people, that's roughly the cost of a few takeaway coffees each week or one less meal out each month.

It isn't nothing. But it can be manageable.

The trade-off is between slightly less spending today and aiming for a more comfortable retirement.

Making increases more manageable

One way to make pension increases easier is to time them with a positive change in your finances. This could be when you receive a pay rise or a bonus. It might also happen when a regular expense ends, such as finishing repayments on a loan or when childcare costs reduce.

If you increase your pension contributions when your income rises, your take-home pay can still increase overall. You’re simply directing part of that extra income towards your future rather than spending it all today.

Another option is to start small and increase contributions gradually. Increasing by 1% today and adding another 1% in six months time or a year later can feel more achievable than making a large jump all at once.

Sometimes steady progress can work better than waiting for the ‘perfect’ moment.

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Why time matters more than you think

The real power of increasing contributions early isn’t just the extra money you put in.  The extra time means more opportunity for your money to benefit from potential investment  growth. 

Plus, pension investments can also benefit from compound interest. This means your money earns returns, and those returns can then generate returns of their own.

Over long periods, this compounding effect can become significant.

Imagine you're 21 years old, just starting your career with a £25,000 salary. You're auto-enrolled into a workplace pension and contribute 5%, while your employer contributes 3%. That means around £165 per month goes into your pension in total.

If you increase your contribution by just 1% of salary, that adds about £21 per month from your contribution (around £17 after tax relief).

Here’s where time makes the difference. With around 47 years until age 68, and assuming modest salary growth and investment growth of 3%, that extra 1% could increase your pension pot from roughly £194,000 to £218,000 - an extra £24,000.*

The earlier you make this change, the more time and opportunity your money has to grow. 

How small increases add up over time

The impact of a 1% increase depends on factors such as salary, investment returns and how long the contributions continue.

The examples below illustrate how small increases can grow over time.

A few things to keep in mind

Increasing pension contributions can strengthen retirement savings, but it may not always be the right step for you.

If you have any high-interest debt, it may make sense to prioritise paying that down first. If money is tight, even a small increase might not feel manageable right now.

Financial decisions depend on individual circumstances. If you’re unsure whether increasing contributions makes sense for you, it may help to use PensionBee’s Pension Calculator to explore different scenarios or speak to an Independent Financial Adviser (IFA).

Small steps can still make a difference

Improving retirement savings doesn’t always require dramatic changes. Sometimes the most effective steps are the ones that feel manageable.

You might choose to increase contributions when you receive a pay rise. Or you may simply decide to start today.

Either way, the important step is just starting.

The best time to increase pension contributions might have been years ago. But the second best time could be now.

*Assumes a starting salary £25,000 at age 21, 2% annual salary growth, 3% annual investment growth, 0.7% annual management charges, contributions to age 54, no withdrawals.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice. Tax rules can change and benefits depend on individual circumstances. This information shouldn't be regarded as financial advice.