Income Protection Providers Need to Allow Extra Cover for Pension Contributions

With the majority of mainstream income protection insurers it is only possible to cover 50-60% of gross annual income. This amount is often just enough to cover a client’s essential monthly outgoings but generally doesn’t leave enough room to cover the pension contributions a client would still need to make during incapacity in order to survive financially during retirement.

Given this, Drewberry strongly recommends that providers of individual income protection insurance allow additional cover for pension contributions, like what is possible with group income protection and executive income protection.

Drewberry suggests that insurers provide an option to cover a specified pension contribution when setting up new income protection plans, in addition to the usual 50-60% for lifestyle protection.



50 – 60% of gross income is usually only enough to cover the bare essentials

When setting up income protection it is only possible to cover 50 to 60% of gross income with most providers. As an income protection benefit is paid tax free, providers don’t allow policyholders to cover 100% of income in order to avoid situations where a client is better off out of work than in work.

The problem is that even with income protection covering the maximum allowable (50-60% of gross income) clients still face a significant reduction in take home pay, especially for basic rate taxpayers.

In the example below, with an insurer that only allows a client to insure up to 55% of their gross income (which is the case with four major IP insurers), for someone earning £35,000 per annum claiming on their income protection plan would result in a 29% fall in take home pay relative to their normal working wage (amounting to £643 per month). The reduction in take home pay would be 20% for someone earning £70,000 per annum.



Significant loss in take home pay with income protection

Gross Annual Income



Monthly gross income



Monthly net income



Maximum cover (@55%)



Reduction in take home pay


Percentage reduction


Such large reductions in take home pay mean that it is often only possible to cover a client’s essential outgoings – such as their mortgage/rent, council tax, utility bills, food, travel and childcare costs etc, with very little room for other outgoings, such as pension contributions.


Incapacitated in working life and broke in retirement

If someone suffers a long period of incapacity and has income protection then they will be able to pay for all their essential outgoings but it is unlikely they will be able to save enough for retirement, especially with such a large fall in take home pay whilst claiming income protection benefit.

For example, for someone on £36,000 per annum a sensible total pension contribution would need to be around 10% of annual income. This amounts to £300 a month and this extra amount would often be difficult to cover in full with income protection given the current cover/income limits.

Without being able to save sufficiently for older age it is likely that someone who needs to claim long-term on their income protection policy could face a life of poverty when the policy term ends and payment stop.



Missed pension contributions can amount to tens of thousands

Even five years of missed pension contributions can amount to a significant amount in lost pension savings come retirement.

For example, assuming a net investment growth rate of 5% per annum, if someone missed being able to contribute £300 per month in the 5 years before retirement this could amount to lost retirement savings of around £20,000.

Lost pension savings whilst incapacitated

Savings lowered by

5 years


10 years


15 years


20 years


Based on contributions of £300 per month and 5% investment growth


If someone needed make a long-term income protection claim and missed being able to afford pension contributions of £300 per month for 20 years before retirement, they could have a staggering £124,000 less in their pension pot to fund retirement.




Tom Conner, director at Drewberry comments, “Whether a client is working or claiming on their income protection policy there is still a huge need for them to be able to save sufficiently for retirement.

For someone that may never be able to go back to work, income protection is their financial lifeline, but what do they do after the policy term ends and their benefit payments stop? Their bills certainly don’t stop coming in.

If income protection providers allowed an additional amount of cover for pension contributions then someone who’s unfortunate enough to become long-term incapacitated would still be able to fund life after their income protection policy ends.”

Our Recent News

4 HR Adaptations Needed as Over-65s in Work Hits Record High

Over the past 15 years, the number of working over-65s has increased by 124%. What adaptations do HR departments need to implement to manage this changing, ageing workforce?

SME Workers Reveal Employee Benefits Wish List

We asked employees which employee benefits their employer offered them. We also asked them which they'd like to see, charting the mismatch between what was on offer and what was on employees' wishlists.

55% of SME Workers Regularly Feel Stressed (and It’s Even Worse for the Young)

More than half of SME workers are stressed and employers are falling short of giving proper support. But what can be done?