The £1.4m pot you need to match a top civil service pension

Being the cabinet secretary of the United Kingdom is a big job. As the official adviser to the prime minister, they are responsible for ensuring that the government runs properly and for overseeing about half a million civil servants.
Applications are open until October 20 for Simon Case’s replacement — and while the £200,000 salary pales in comparison with the average £4.2 million pay packet of a FTSE 100 chief executive, there is one very important perk: the pension.
The Civil Service Pension Scheme pays a guaranteed inflation-linked retirement income based on career earnings. Workers contribute between 4.6 per cent and 8.05 per cent of their salary, and their employer — the government — pays in an unbelievably generous 29 per cent.
It is so generous that a civil servant who began their career at 21 on the average service wage of £33,980 could expect a salary of about £112,000 at 67 and a retirement income of £72,000 a year, according to calculations by the investment platform AJ Bell.
Civil service pensions are DB — defined benefit (also known as final salary). These are schemes where what you get in retirement is guaranteed, inflation-linked and related to your salary. They used to be common but have largely disappeared outside the public sector because they are so expensive to provide. Most private sector employees now save into DC — defined contribution (or money pot) schemes, where the size of your pension pot depends on how much is paid in, and how your investments perform.
To buy a guaranteed retirement income of £72,000 through an annuity insurance product, you would need a DC pension pot of £1.44 million, according to Hargreaves Lansdown, another investment platform.
Some 900,000 private sector employees had DB pensions in 2019, according to the Office for National Statistics (ONS), down from 3 million in 2006. But 6.6 million public sector employees had DB pensions, up from 5.1 million in 2006. The public sector workforce actually shrank 11 per cent in that time.
The four biggest public sector schemes — the civil service, NHS, armed forces and teachers — paid out £40.6 billion to 3 million savers in pension and lump sum payments last year. This was up from £26.1 billion in 2010-11, despite reforms brought in to make them less generous.
Some argue that public sector pensions have to be good to make up for lower wages, but the gulf between what DB and DC pension holders will get in retirement is vast, as our civil servant example suggests. Here’s why.
Public sector workers pay larger proportions of their salary in to their pensions (apart from those in the armed forces who do not have to make contributions).
NHS workers pay in between 5.2 per cent and 12.5 per cent while teachers contribute 7.4 per cent to 11.7 per cent depending on their salary. The government contributes about 29 per cent for civil servants and teachers and 24 per cent for NHS workers.
By comparison most private sector pensions follow auto-enrolment rules, where employees pay in a minimum of 5 per cent of their salary and employers contribute a minimum of 3 per cent.
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The ONS said that about 21 per cent of workers had an employer who contributed between 4 per cent and 8 per cent. The Sunday Times found 19 FTSE 100 companies that contribute between 10 and 20 per cent and is campaigning for the minimum rate of employer contributions to rise to 5 per cent.
Employer contributions make a big difference. A 30-year-old earning £50,000 a year with the 8 per cent minimum contribution to their pension would have a pot worth about £396,000 by 65, according to the platform Interactive Investor. That assumed investment growth of 4 per cent a year after fees and pay rises of 2 per cent a year.
If 10 per cent of their salary was paid in to a pension, they would have about £495,000 at 65. With contributions of 25 per cent, they would get about £1.5 million and with 35 per cent — comparable to the civil service scheme — they would have £1.7 million.
With a DC pension, the amount you save into your pot has a direct impact on the amount you get at retirement. You can use your pot to buy an annuity or keep it invested and take income from it when you need to.
With a DB pension the contributions help to fund the overall pension scheme but your retirement income is usually based on your average salary over your career.
Workers who joined the civil service after April 2015 are in its “alpha” pension scheme where they accrue pension income of 2.32 per cent of each year of earnings. These added together provide their annual pension income, which is adjusted for inflation each year. The other big public sector schemes work similarly. The NHS accrues 1.8 per cent of salary a year, and teachers 1.75 per cent.
Here’s how it works: on the median civil service salary of £33,980 (according to the Institute for Government, a think tank) you would accrue pension income of £788 a year. The next year, if inflation was at 2 per cent, the sum would be adjusted to take that into account, increasing it to £804. Then, assuming you did not get a pay rise, you would accrue another £788, giving you a pension income of £1,592 a year. After ten years, assuming a few pay rises along the way, you would have accrued a pension income of more than £10,000.
It can all work out very generously for those who stick with their employers and rise through the ranks. Public sector pay has gone up an average of 2.7 per cent a year since 2011, according to the ONS, so the civil servant starting out on £33,980 at 21 would be earning £112,000 by 67 and would have that accrued pension income of £72,000, AJ Bell said.
To buy an inflation-linked annuity income at 67 of £72,000 a year for life that provided a partial payout to a spouse when you die, you would need to save an average of £10,500 a year (£875 a month) into your pension from 21. This assumed investment growth of 4 per cent a year after fees, Hargreaves Lansdown said, and would give you a pot of £1.44 million.
Helen Morrissey from Hargreaves Lansdown said: “The civil service pension scheme is extremely generous and for someone with a DC pension to match the kind of income generated would involve eye-wateringly high contribution rates.”
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Of course, not everyone stays in the civil service for an entire career. The average annual retirement income paid across the big four public sector schemes was about £11,500 in 2023-24, and £8,724 in the civil service scheme.
The government told a National Audit Office inquiry into public sector pensions in 2021 that the generosity of public sector schemes was a key selling point in recruiting and retaining workers.
The flipside is that pay is often not as high as in the private sector. The Institute for Fiscal Studies said that the salaries of top-earning public sector workers had fallen behind the private sector over the past 15 years, particularly in London and the southeast.
Lord O’Donnell, the cabinet secretary between 2005 and 2011, said last week that his old job was “massively underpaid”. A government survey of 346,957 civil servants in 2022 found that only 32 per cent were satisfied with their pay and benefits. Some 55 per cent of those who intended to leave said it would be “for a better pay and benefit package”.
Private sector workers despairing at their meagre pension should look at how it is invested.
Workplace pension contributions are usually put into a default fund — a “balanced portfolio” of company shares, bonds and other assets. Younger savers could, however, consider a riskier fund that may deliver higher returns.
Also consider how much you are paying in. Every time you get a new job or pay rise, think about increasing your pension contributions. Check the maximum that your employer will pay in — if it will match contributions up to 7 per cent, for example, try to meet that. Paying in more, particularly early in your career, will have a big impact on your final pot.