Why you shouldn’t stop paying into a pension
BY Harvey Jones
24th Jan 2023 Pensions & Retirement
Pausing your pension contributions may help you cut back for the cost-of-living crisis, but it could hurt your future finances far more, says our money expert
Almost everybody is looking to make cutbacks as the cost-of-living crisis bites but there is one money-saving measure you should resist if you possibly can. One in four savers are wondering whether they can afford to continue saving into a pension, research from insurer Aviva shows.
"One in four savers are wondering whether they can afford to continue saving into a pension"
Five million are thinking of opting out of auto-enrolment workplace pension schemes, while others are planning to reduce, pause or stop their contributions to ease the financial squeeze.
It’s understandable, but could be a huge mistake. They will have less money at retirement as result, and that’s not all they are missing out on.
You’re turning down free cash
Your employer matches any contributions to your pension from your salary, which you would miss out on if you paused your workplace pension scheme
Anybody who stops paying into a pension is effectively turning down free money.
They will lose much, much more than they will ever save. The total loss over time is staggering. Yet many do not realise what they are giving up because they don’t really understand how pensions work. That's understandable, given how complex they are.
Workers who make contributions to a company pension are rewarded with matching contributions from their employer. Typically, this is equivalent to 3% of their salary, but can be between 5% and 10% on more generous company schemes.
If you stop paying into the pension, you will lose that cash. The employer won't pay if you aren't doing your bit. That’s not all you lose.
You will lose tax relief, too
Pension contributions also attract tax relief from the government, as a further incentive to save for the future, and ease the burden on the state.
A basic rate 20% taxpayer who pays £80 into a pension will see that topped up to £100. A higher rate 40 percent taxpayer only pays £60 for each £100 that goes into their pension. Remember, this is on top of any employer contribution.
"Pension contributions also attract tax relief from the government"
Anybody who stops paying in will lose this tax break. Many will have no choice, as times are tough, but they also need to understand exactly how much they will sacrifice by doing so.
And there’s another downside.
All that growth is gone
Young workers miss out on far more on tax free pension growth if they pause their contributions
As well as losing the employer contribution and tax relief, you will also miss out on all future growth on your pension contributions.
Insurer Standard Life calculates that a worker on the average salary who pauses their plan for just one year at the age of 35 will end up with £13,000 less in their pot at retirement. As well as losing the initial contribution, they would lose more than 30 years of tax-free growth on the money.
The longer they stopped paying into a pension for several years, the more they would lose.
Younger workers may think they can play catch-up later, but in fact they have most to lose from pausing pension contributions. That's because they will miss out on far more years of tax-free pension growth. It’s an act of financial self-harm.
Stand by your plan
The self-employed do not get an employer contribution, so the loss is not quite as great. But they still get tax relief on any money they pay in themselves, which they will sacrifice if they stop paying in.
Lower income workers who claim means-tested benefit universal credit will also suffer if they opt out of a company pension.
"The self-employed get tax relief on any money they pay in themselves, which they will sacrifice if they stop paying in"
The Department for Work and Pensions ignores pension contributions when calculating net earnings, so most of the money saved by stopping pension contributions is likely to go in lost benefit.
As a rule of thumb, stopping pension contributions of £100 will mean claimants get £55 less Universal Credit.
The message is clear. Stand by your pension if you possibly can.
HOW WE CAN HELP
If you need expert advice or help and support with your pension and retirement planning from a trustworthy source, contact Unbiased today.
Read more: How to be smart when saving for retirement
Read more: What's the best way to save for retirement?
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