The pension cost of doing a PhD

The conversation around low PhD stipends has amplified recently. However, few have explored how doing a PhD affects your long-term wealth, including your pension.

A pension is cash that is invested incrementally on your behalf, so that it returns a larger sum that can be claimed after you’ve reached a given minimum age. Most people will receive a state pension, a regular government payment based on when you were born and your tax contributions. You can also receive a private pension, which offers more flexibility, has more potential to grow and is controlled by the employee. The important bit is that the earlier you contribute, the more time the investments have to grow.

I remember seeing ‘pension contribution £150’ deducted from my salary in my first payslip. Back then I thought I’d much rather have the money in my pocket. Fast-forward 11 years, and much of my income goes towards immediate expenses like a mortgage, groceries and commuting, so there is very little left to save towards my retirement. I wish I had been more aware of its relevance when I was younger.

Then it struck me: during my PhD there was no pension contribution. Had I worked those four years in industry instead, not only would I have earned a higher median salary of £40,000, I would have accrued a minimum pension contribution of £3200 per year. This may sound modest, but over time this grows quickly, especially when regularly topped up.

Does doing a PhD affect my pension?

In the UK, salaried employees who earn above a certain threshold have the right to receive modest pension contributions of at least 3% of their salary from their employer, provided the employee contributes at least 5%.

However, most PhD students in the UK aren’t considered employees, thereby missing out on benefits such as pension contributions. This means most PhDs only start contributing towards their pension when they are formally employed. This effective delay significantly hampers their final pension provision and when they can afford to retire.

A PhD student might receive a salary alongside their stipend, for instance if they perform additional teaching work (although these earnings often fall below the threshold that triggers employer pension contributions). However, for the most part, research-council funded PhDs are almost exclusively stipends. Industry-funded PhDs are usually a stipend too, partly because it helps the business overcome legal obligations such as tax or visa restrictions, but some companies may opt to pay a salary.

In principle, PhDs can voluntarily pay into a pension regardless of their employment status, but this is not common knowledge. Moreover, the generally limited PhD student income means that most can’t afford to do this anyway.

How can it affect you?

A 23-year-old starting work immediately after graduating might reasonably contribute £3000 per year into their pension. If they retire at 65, and assuming their pension grows 7% annually (a rate of growth commonly assumed by pension providers), they might save over £760,000. But, if they do a 4-year PhD and then start working at 27, the same £3000 per year contribution would generate a retirement fund almost £200,000 smaller. In fact, the 27-year-old would have to contribute £4000 a year just to reach the same final wealth as the 23-year-old.

People do increase their contributions as their salary increases, and PhD holders generally earn more than master’s graduates. However, salary data from the RSC’s Pay and Reward survey suggests that if an employee sticks to the minimum salary percentage contributions throughout their career, the average PhD holder would have around £100,000 less in their pension pot than BSc and master’s graduates on retiring at 68. The dominant factor affecting your retirement wealth is the length of time your pension has had to grow.

What can you do about it?

There is some hope. The first step is to become more financially literate to make informed decisions. I enjoyed reading Money: A User’s Guide by Laura Whately, which offers practical advice on topics including pensions, saving and mental health. There are also many accessible podcasts that talk about personal finance.

If you want to take more active control of your financial future, you can work out what lifestyle you want to lead in retirement, estimate its cost, and work towards building the required wealth. The PLSA, a trade body advocating retirement living standards, suggests a comfortable lifestyle for a couple may require a pension of £1.2m (equivalent to a yearly retirement income of £60,000). A more modest lifestyle for a single retiree might require a pension of £600,000.

Whatever lifestyle you want to have, the best thing you can do is to actively think about your finances as part of your wider wellbeing. Even a modest pension contribution now can help you in the future.