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Join Which? Money5 things to do before cutting your pension contributions
One in five are stopping or reducing their payments to cope with the increased
cost of living
If you're over 22, in full-time employment and earn more than £10,000 a year, it's likely you've been automatically enrolled into a workplace pension and you're paying at least 5% of your salary into it.
However, you're not legally required to pay into your pension, and recent surveys indicate that many workers – especially younger workers and those struggling with mortgage bills – are cutting back.
Here, Which? takes a closer look at the impact of cutting contributions and the five things you need to consider before doing it.
Who is cutting pension contributions?
In May, a survey of 2,000 people by investment firm Hargreaves Lansdown found that one in seven had stopped their contributions, and 8% had cut them back.
Three in 10 workers that had taken this action were aged 18-34, compared with just two in 10 aged 35-54.
In May, another survey of 2,004 people – this time by financial planning firm Saltus – found that one in five said they would have to cut pension contributions to cover rising mortgage costs.
As the cost of living crisis continues to bite, it’s no surprise that workers are having to find extra money from their budgets.
Our latest consumer insight tracker found that 1.3 million missed or defaulted on a household bill payment in the past month, and 65% failed to pay more than one.
What happens if you stop paying into your pension?
If you were to pause contributions for three years, your pension pot could be worth almost £50,000 less when you come to retire, according to Hargreaves Lansdown.
The firm crunched the numbers to find out how much a worker, who starts saving into a pension aged 22 with a salary of £28,000, would have when they retire aged 67.
It estimates the pension pot would be worth £517,403, assuming an annual salary increase of 2%, investment growth of 5%, and an annual pension contribution of 8% (5% from the worker and 3% from the employer).
If that same worker were to pause their contributions for three years between the ages of 30 and 33, the sum invested would continue to grow 5% during that period, but their total pension pot would be worth £470,114 when they come to retire.
- Find out more: use our pension calculator to check what your pension pot might be worth at retirement
5 things to do before pausing contributions
If you're considering cutting or pausing your pension payments, here are five things to think about before you make a decision.
1. Find out how much you need to retire
According to our cost-of-retirement survey, a household of two needs an income of at least £28,000 a year for a ‘comfortable’ retirement that includes some luxuries such as European holidays and meals out.
To generate that income we estimate you'd need £115,000 -£131,000 in your private pensions.
- Find out more: how much will you need to retire?
2. Understand what savings you'll miss
When you save into a pension, the government boosts your pension contributions via tax relief. Self-employed people also get tax relief.
This means that money you would have paid in tax on your earnings goes towards your retirement savings instead.
If you're a basic-rate taxpayer and were to contribute £100 from your salary into your pension, it would actually only cost you £80. The government adds an extra £20 on top – what it would have taken in tax from £100 of your salary.
You may also lose out on the 3% employer contribution which is effectively 'free money'.
- Find out more: tax relief on pension contributions explained
3. Speak to your employer
Before making any major changes, it’s a good idea to discuss your options with your employer.
You may be able to lower the amount you contribute, rather than stopping altogether.
4. Get free pensions advice
If you need help and advice about your pension, you can get free, impartial guidance from the Money and Pensions Service.
Plus, if you're over 50, you can book a free guidance session with a specialist.
- Find out more:how to get retirement and pension advice
5. Set a date to re-evaluate
Helen Morrissey, pensions expert from Hargreaves Lansdown, said the most important thing if you do decide to cut your contributions altogether, is to resume them as soon as you can.
She said: ‘Make a note in your diary at a regular interval to remind you to assess whether you can afford to restart, otherwise it may be something you don’t get round to doing.
‘Auto-enrolment means you will be re-enrolled every three years but, ideally, you don’t want to spend three years not saving for retirement unless you really must.'
- Find out more:pension auto-enrolment: how it works
