People who put a pay rise into their pension pot are set to see an increase in their annual retirement income, PensionBee has found.

Analysis by the online pension provider found that regular pay, including bonuses, rose by 8.5% in the UK during the year to July, taking the average annual pay to £34,528.

PensionBee said that while climbing prices might take the shine off a pay rise, for those able to consider putting part or all of an increase into their pension, the reward for doing so in retirement can be significant.

Analysis has shown that a 40-year-old on the average annual salary, who puts an 8.5% pay rise of £2,705 (£225 extra a month) into their pension each year, could boost their pension pot by £90,000 at retirement.

By the time this person reached retirement age, their overall pension pot would be worth £286,673, rather than £196,612. This potentially gives an extra £3,600 a year in additional annual retirement income after the 25% tax-free lump sum is taken, which is more than the amount of annual income given up today.

Director of public affairs at PensionBee, Becky O’Connor, said: “If you can live without the extra income today, then putting your pay rise in a pension can mean having an even bigger ‘pay rise’ later on, from your pension income.

“A pay rise is a prime opportunity to boost your pension because you may not miss money you never had.

“Most employers will allow you to increase your contributions to whatever you want, either as a percentage of salary or in pounds and pence, so if you know a rise is due, think about whether or not you can make the most of it in the long term by putting it in your pension.

“This can be especially beneficial for those workers approaching the age they can first access their pension, at 55 (rising to 57 in 2028). For them, it’s not that long to wait to get the benefit of the decision.”

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