We’re living in turbulent times. As bills and the cost of living keep rising, most of us expect to cut back on spending or saving. Everyone’s circumstances are different. For example, you may be considering that pausing your pension contributions is the sensible option if it helps you to reduce your outgoings.
However, pausing your pension contributions – even for a short period of time – could have a big impact further down the line. Here are a few things to think about if you decide to stop or reduce your pension payments.
The information in this article is intended to help you make informed decisions about your pension and should not be taken as financial advice. As we say, the best course of action for you will depend on your individual circumstances. If you need extra support on making any financial decisions, please read the ‘Getting additional support' section of this article.
You'd lose payments from your employer
One of the benefits of a workplace pension is that your employer contributes to it. Since the implementation of auto-enrolment 10 years ago, employers are required to make pension contributions for those employees who meet certain criteria. From April 2019, the total minimum contribution for a workplace pension is 8% – this is made up of a payment of 3% from your employer whilst you pay 5%. Depending on your pension scheme rules, these payments could be higher.
For example, if you earn £25,000 a year and pay the minimum of £1,250 (gross) a year (5% of your earnings) into your pension, your employer will top that up by at least £750 (gross) a year (3% of your earnings). If you choose to stop your contributions into your workplace pension (or reduce them to less than 5% of earnings), your employer could stop making their own payments. And taking a break from your pension payments for a year, might mean missing out on a top-up of £750 from your employer.
If you’re looking for more information, our pension basics article takes you through how a workplace pension works.
You’d miss out on tax relief from the government
Contributions you make to a pension scheme are eligible for tax relief – the extra money you get from the government. Simply put, if you stop contributing, you’ll miss out on this tax relief.
How tax relief is given depends on the type of pension scheme you’re contributing to. If you’re paying into a personal pension scheme, whether directly or via your employer, your contributions are paid from your earnings after tax has been deducted. Your pension provider claims basic rate tax relief directly from HMRC and pays this into your pension pot. If you pay tax at a higher rate, you can claim that additional tax relief from HM Revenue & Customs, usually via self-assessment. Note that the value of any tax relief will depend on individual circumstances.
Here's an example. Harry pays a personal monthly net contribution of £400 to his employer’s group personal pension scheme. His employer deducts the net amount from Harry’s pay after tax has been deducted. The £400 is paid to Harry’s personal pension plan and basic rate tax relief of £100 is added which means a gross contribution of £500 per month is invested. This means that his total gross annual contribution to his personal pension is £6,000 (£4,800 net).
If you’re a member of your employer's occupational pension scheme, your contributions are deducted from your pay before tax is applied. That way, you get full tax relief on your contributions straight away.
This information is based on our understanding of current taxation law and HMRC practice, which may change.
You may need to work longer
If you were to pause your pension contributions now, you might need to work longer to make up for these lost funds. It’s worth bearing in mind that many people are already putting aside too little to provide the retirement lifestyle they want.1 Cutting your payments now could impact your future lifestyle further, or mean you have to work longer to build up your pension pot.
The State Pension might not cover your retirement lifestyle
When looking at the support available to the elderly – from concessions on travel to help with winter fuel costs or TV licenses – it may be tempting to think that retirement will be an easy financial ride, particularly when the State Pension is there to support you. However, the State Pension is likely to only cover the basics of living when you retire, whilst your workplace pension may be able to help fund the other activities you’d like to enjoy in retirement.
Before reducing or stopping your workplace pension payments, check out whether the State Pension would provide for the retirement lifestyle you hope for. Also remember that the State Pension won’t be available until your late 60s. For more information, you can check your State Pension forecast on the GOV.UK website.
You can also read more about the State Pension in our article by Kate Smith, our pensions expert.
Think about the here and now vs the long term
Pausing your pension contributions is a trade-off between money to use now and more money when you access your retirement savings. It may be that choosing to pause your contributions rather than skipping other payments, is a better choice for you due to the cost of living crisis. However, if you can afford to, continuing to contribute each month, even if it’s a small amount, could help you stay on track towards your retirement plan.
Getting additional support
It’s important you make the right decisions for you – and speaking to a financial expert may help. Financial advisers can help provide you with reassurance about your finances – and work towards improving them.
While an adviser can’t guarantee that your investments will rise, their support might give you that confidence boost when it comes to money management. You can find an adviser on MoneyHelper – there’s likely to be a cost.