Should you cut your pension contributions?

Saving money now could cost you well into the future

With the cost of living crisis taking its toll, you may be tempted to cut back on your pension contributions to save money.

According to a new report by pensions firm Scottish Widows, one in 10 savers have stopped or cut back on their pension contributions due to the cost of living crisis

If you're auto-enrolled into a pension scheme run by your employer, it's likely that at least 5% of your salary is going into your pension.

However, although reducing or stopping your contributions could be a tempting quick win for your short-term finances, it will have consequences when you come to retire. 

Here, Which? explains what you should consider before cutting your pension contributions. 

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Why might you want to cut your pension payments?

In April, workers were hit with a rise in National Insurance payments, and an increase in household bills such as energy and council tax. 

Not only are people paying more every month, but inflation reached 9.1% in May. According to the Office of National Statistics, the biggest price rises driving up inflation have been transport, clothes and shoes and food. 

According to the latest retirement report by pension provider Scottish Widows, one in 10 UK adults (11%) admitted they had reduced their pension contributions or stopped contributing all together due to rising costs. It also found almost a quarter (24%) had dipped into their savings. 

The report, published in June, said savers in their 30s, who reduced their contributions on average by £47 per month, could have £1,000 less in their pension pot when they retire if they kept this lower level of contributions for a year. 

Although £1,000 might not seem like a lot, for anyone that doesn't increase their pension contributions after the cost of living crisis has passed, their pension pot could end up being £23,000 down.

How much do you pay into your workplace pension?

If you're over the age of 22, in full-time employment, and earn over £10,000 a year, it's likely you've been automatically enrolled into your workplace pension. 

Auto-enrolment pensions were launched in 2012 and now have a total minimum contribution of 8% of your qualifying earnings. 

Your employer must pay 3% as a minimum, and the remaining 5% is paid by you. Your contribution includes tax relief, so less than 5% will come out of your salary.

You're not legally required to pay into your pension, and your employer can't require you to.

If you're self employed, you're not required to pay into a pension. But not contributing anything, and relying on the state pension, is unlikely to be enough to fund your retirement.

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What happens if you reduce contributions?

If you reduce your contributions, you could be giving up far more than you think.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown said people should bear in mind tax relief and employer contributions. 

She told Which?: 'Over time this extra cash can significantly boost how much goes into your pension as well as how much you get at the end.'

Here's how they can boost your pension: 

Employer contributions 

If you cut your contributions and no longer pay the 5% minimum contribution, then you could forfeit your employer contributions. 

If you reduce your contributions below 5%, it's up to your employer whether they let you remain in the pension scheme. 

You could risk losing that 3% employer contribution (effectively 'free money') altogether.

Tax relief 

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 are 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.

In Scotland, income tax is banded differently and pension tax relief is applied in a slightly different way. 

Even if you’re not eligible for auto-enrollment or if you’re self employed, you can still benefit from tax relief if you pay into a personal pension. 

Small reductions can have a big impact 

Even reducing your pension contribution by a small amount can have a huge impact on your retirement.

Pension provider Aegon found a one-year pension break for a 25-year-old on average earnings of £29,000 and contributing the minimum amount in their workplace scheme, would mean they'd miss out on £4,600 at state pension age.

During this period they would forfeit workplace employer contributions worth £683. Their monthly saving from take-home pay would be only £75.

 If pension payments were paused for two years, this could mean missing out on £9,100 and £13,600 for three years.

Aegon Analysis, April 2022. Values in today’s money terms adjusted for 2% inflation. Assumes: Pension break begins age 25, total pension contribution 8%, salary £29k increasing 3% annually, investment growth 4.25% (incl. fees)
Aegon Analysis, April 2022. Values in today’s money terms adjusted for 2% inflation. Assumes: Pension break begins age 25, total pension contribution 8%, salary £29k increasing 3% annually, investment growth 4.25% (incl. fees)

Steps to take before cutting your contributions 

If you still want to cut your pension contributions, it's worth checking out the steps below first. 

1) Get help with the cost of living 

There may be other ways to make ends meet, so you don't need to take the costly step of cutting pension contributions.

Which? has set up a dedicated cost of living hub to give tips and advice on how to cut the cost of your household bills, essentials and make the most of your money. 

2) Find out how much you need to retire

Our Cost of Retirement survey found a household of two needs at least £18,000 for a retirement that covers essentials only, and £28,000 for a ‘comfortable’ retirement - which includes some luxuries such as European holidays and meals out. 

The figures are £12,000 and £19,000 respectively for a single person. 

Your state pension will cover some of this, which is worth £185.15 per week in the 2022-23 tax year, but not everyone gets that much. 

You are also not able to take your state pension until you reach state pension age (SPA). This is currently 66 for men and women, but for those born after 5 April 1960, there will be a phased increase in SPA to 67 and eventually 68. It's likely to go up further in future. 

However, you can start taking money from your workplace pension earlier. Most pension schemes will allow you to take your pension from 55 (rising to 57 in 2028), unless they have rules stipulating another date.

Use our pension calculator to get a better idea of how much your pension pot might be worth in retirement.

3) Speak to your employer

Before making any major changes, it’s a good idea to discuss your options with someone else.  

Kaya Marchant, pensions expert and the Money and Pensions Service told Which?: ‘If you’re worried about money, talk to your employer to see if you can lower the amount you contribute rather than stopping altogether.  

‘Your employer only has to action a request to re-join a workplace pension scheme once every 12 months so check with your employer as to what you’re able to do before you make a decision.’

4) Get free pension advice  

The MoneyHelper service can provide free, impartial guidance from its pension specialists. Call  0800 011 3797 or visit moneyhelper.org.uk.

MoneyHelper also offers the Pension Wise service, where over-50s can get a free 45-60 minute appointment with a specialist to help you understand your options when you retire.

If you’re worried about debt of falling behind on bills and payments you also use its MoneyHelper Debt Advice Locator Tool.

Citizens Advice and StepChange can also provide free debt advice - look out for firms that impersonate them. 

5) Set a date to re-evaluate

If you decide to cut contributions altogether and leave your workplace pension scheme, you will be automatically re-enrolled every three years. 

It’s a good idea to re-evaluate your decision as soon as your finances improve.

If you'd cut contributions, you may forget to increase them or get used to the extra money. Put a note in your diary or set a reminder on your phone. 

If you decide to reduce your contributions then you can increase them at any point - just let your employer know in writing. 


This article was updated on 5 July to reference Scottish Widows' latest report on pensions and retirement.