SWT Wealth Management
Advertising feature: With the cost-of-living crisis and households feeling the pinch, it’s tempting to consider reducing or stopping pension contributions. Cutting costs is high on the agenda of most households at the moment. However, before considering reducing or stopping pension contributions it’s worth remembering there is a downside to this money saving tactic.
With auto enrolment, most employers will offer a workplace pension scheme. The employee contributes a minimum of 5% of their salary and the employer contributes at least 3%. Although the employer must offer a pension scheme it is not mandatory for you to join it. Thus, it could be tempting to opt out, or stop contributions to try and save money.
The self-employed do not have the luxury of having an employer’s pension scheme. The correctly advised, would have set up a personal pension so that they can extract money from their business tax efficiently and be able to put money away for their retirement. Again, when times are hard they may consider reducing or stopping their pension contributions.
But is it wise to opt out of schemes or reduce or stop pension contributions?
The simple answer is no it is not. This should be the last thing you consider after you have reduced costs on other luxuries and household spending first.
Joining your employers scheme means your employer also contributes to your retirement fund. This helps boost retirement savings and you benefit from additional funds from your employer other than your salary. A huge benefit you would be giving up if you opted out of your workplace scheme. Some employers even contribute more than the 3%. If you pause your own contributions to your workplace pension scheme you then lose the right to the employers’ contributions, and they will also stop. However, if needs must and you do reduce or stop pension contributions, you should make this reduction or pause as brief as possible. The long-term impact to your retirement income could cost you thousands in the long term. The longer you reduce or pause your contributions, the harder it will be to make up for that gap in the future.
Research by Canada Life shows 5% of UK adults have stopped contributing into their pension scheme due to the cost-of-living crisis with a further 6% considering doing so, and another 9% thinking they will also stop contributing at a later date if costs continue to rise. 1
For someone with an annual salary of £25,000, aged 22 in a workplace pension scheme, making 5% employee and 3% employer contributions they would have a total retirement fund of £456,893 at the age of 68. Stopping pension contributions at the age of 35 for just one year, would result in a total pot of £444,1292 – almost £13,000 less than if they had not paused contributions. Stopping contributions for a longer period would have an even bigger impact:
When living costs rise, those on fixed incomes like the state pension, are most affected. If your only source of income in retirement is the state pension, it will be then you reflect back on the time you opted out of your workplace scheme or didn’t set up or contribute to that personal pension fund.
1Source: Canada Life Research Aug 2022
2Calculations are intended only for the sole purpose of providing an illustration regarding the projection of savings and pensions. They should not be used with the intention to give an accurate representation of real-world outcomes.
SWT Wealth Management is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.
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