It’s only natural to feel as if we’re living in turbulent times. As bills and the cost of living keep rising, most of us tend to cut back on spending or saving.
Everyone’s financial circumstances are different. For example, you may be considering that pausing your pension contributions in tricky times is a sensible option if it helps 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 do 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 shouldn’t be taken as financial advice. As we say, the best course of action for you will depend on your own circumstances.
If you need extra support on making any financial decisions, please read the ‘Getting additional support' section of this article towards the end.
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 back in 2012, employers are required to make pension contributions to eligible employees.
As of April 2019, the total minimum contribution for a workplace pension is 8% – this is typically made up of a payment of 3% from your employer, and 5% from your wages. 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 guide 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 HM Revenue & Customs and pays this into your pension pot.
If you pay tax at a higher rate, you can claim that additional tax relief from HMRC, usually via self-assessment. Note that the value of any tax relief will depend on individual circumstances.
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. You may not think about it today, but pausing your contributions could have an unexpected impact on your future self.
The State Pension might not cover your retirement lifestyle
It may be tempting to think that retiring will be an easy financial ride, or that it’s a problem for ‘future you’ – 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, while your workplace pension may be able to help fund the other activities you’d like to enjoy in retirement.
As it stands, the current full rate of the new State Pension is £230.25 a week – and that’s if you’re eligible for it. 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 you turn 66 – this is also expected to rise to 67 between 2026 and 2028. For more information, you can check your State Pension forecast on the Gov.uk website.
You can also read more about the State Pension and how it works in our article by our pension experts.
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 – but there’s likely to be a cost.
- How you can improve your financial wellbeing. The research conducted online by Aegon’s Centre for Behavioural Research in July and August 2023 with 10,040 UK residents.