Compare The Platform: The dangers of cutting your pension contributions

Home/Blog/The dangers of cutting your pension contributions
  • The dangers of cutting your pension contributions.

The dangers of cutting your pension contributions

Cost cutting will be high on the agenda for many families struggling with the cost of living crisis. The higher energy price cap coming into force at the end of October will add to pressure on budgets. Even with Prime Minister Liz Truss’s pledge to cap bills at £2,500 a year, households will still see a huge cut to their disposable income.

A study from Canada Life shows that one in 20 (5%) say they have stopped contributing into their company pension to save money. A further 6% say they are actively thinking about pausing their pension contribution. Experts are warnings of the dangers of pausing pension payments.

By opting out of your work scheme – or stopping contributions to a SIPP – you gain access to more of your monthly salary. But the long-term impact of stopping payments to your pension could be detrimental to long-term retirement plans.

Long-term impact

Analysis by AJ Bell shows that a 30-year-old who pauses contributions for three years could end up with a fund £25,000 smaller at state pension age. This assumes a 30-year-old on a salary of £30,000 rising by 2% per year thereafter with an existing pension pot of £25,000 with investment growth of 4% per year after charges. By age 68 the fund is worth around £330,485 versus around £355,438 if they had remained in the scheme throughout – a 7% drop.

As well as stopping your own payments into your pension pot, you’ll essentially be turning down free money in the form of your matched employer contributions (for those that are employed rather than self-employed), as well as the additional boost of pension tax relief from the government.

You will also miss out on compound growth over the time you’ve paused your contributions, so by putting off saving today you’ll need to work harder to make up for lost time later on.

Tom Selby, head of retirement policy at AJ Bell, says,“With the current economic backdrop it is inevitable some will be considering cutting back pension contributions, or even stopping saving for retirement altogether. It’s important anyone considering going down this road is clear on what they are missing out on and the impact.

“Remember that the minimum auto-enrolment contribution of 8% of band earnings will, in a lot of cases, fall well short of retirement expectations and many will need to save extra – either in their workplace scheme or via a private pension like a SIPP – in order to fund the lifestyle they want in later life. Of course, this won’t be possible for many people during a cost-of-living crisis.”

The dent in your pension savings caused by stopping payments means you might have to work longer than planned to reach your goal – or settle for a perhaps less comfortable lifestyle than you would have liked.  Even though you might think about making up the payments at a later date, you can’t get back lost time for compound growth.

Plan and review 

Instead of cutting out pension payments, you could instead take steps to ensure your retirement savings are working as hard as possible.

Review schemes held by previous employers and make sure they offer value for money. If not, consider switching to a low-cost pension such as a SIPP, which might also come with a better range of investment options. You can find the best one for you here.

As a reminder, saving in a pension is an extremely tax-efficient way of investing. All taxpayers get 20% paid by HMRC to the pension and if you pay income tax at a higher or additional rate you can claim relief from HMRC on your self-assessment tax return.

Selby adds, “The key thing in all of this is to have a plan. If you really can’t afford to save for retirement today – and have combed through your weekly spending for alternative ways to save money – then make sure you keep revisiting your budget regularly. The earlier you get back into the savings habit, the easier it will be.”

Photo by dwi rina on Unsplash


About the Author:

Holly Thomas
Holly Thomas is an award-winning financial journalist and former Deputy Personal Finance Editor at The Sunday Times. She writes across all areas of personal finance and consumer issues, specialising in investments, mortgages and property. Previously she worked at the Daily Express and Sunday Express as Money editor and also at Financial Times Business. Holly was voted Freelance Journalist of the Year at the HeadlineMoney Awards in 2016. Her work can be seen in national press including The Times, The Daily Telegraph and the Daily Mail. Follow Holly on Twitter: @holly_thomas_

Comments are closed.