3 practical reasons you shouldn’t reduce your pension contributions during the cost of living crisis


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In recent months, you won’t have missed the headlines that inflation has reached a 40-year high. Dubbed the “cost of living crisis”, soaring energy, fuel and food prices have squeezed household expenditure, meaning you may be looking at ways you can reduce your outgoings.

Reducing or pausing your pension contributions may seem like a simple way to cut your monthly expenditure. However, this could have major implications for your pension savings and your eventual retirement.

Read on for three reasons why cutting your pension payments could lead to problems, and for possible alternative courses of action.

Why you might consider cutting your pension payments

In April 2022, a combination of factors drove up the cost of living for many households:

  • A rise in the rate of National Insurance and Dividend Tax, as well as higher Council Tax payments
  • A significant increase in the energy price cap
  • Steep rises in the cost of living.

With pressure mounting on household budgets, it’s likely you have already taken steps to reduce your expenditure or to change your spending habits.

The Office for National Statistics (ONS) reports that 3 in 5 people are spending less on non-essentials, and half were using less energy at home. 45% of people are cutting back on non-essential journeys to save petrol or diesel.

Research carried out by interactive investor has also revealed that 1 in 4 people have stopped paying into investment accounts to help cashflow following a rise in the cost of living. Of the people interviewed, 5% reported that they’d stopped contributing to their pension.

3 reasons not to cut your pension payments

If you are thinking of pausing or reducing your pension contributions, there are some powerful reasons why this could damage your long-term security. Here are three reasons you should think twice.

1. You’ll potentially lose your employer contributions

If you reduce your pension contributions below the 5% minimum contribution (4% contribution and 1% tax relief), your employer is no longer obliged to contribute to your retirement fund. Consequently, they may stop paying into your account.

If this happens, you could lose your employer’s contribution – typically at least 3% of your earnings – and it’s unlikely you will be reimbursed in any other way.

2. You won’t benefit from the tax relief boost to your pot

When you make contributions to your pension, tax relief from the government increases your pension savings. This is the same for both employed and self-employed workers.

Effectively, money that you would ordinarily have paid in Income Tax is instead paid into your pension savings. So, if you’re a basic-rate taxpayer, a £100 pension contribution only “costs” you £80.

If you pause or reduce your pension contributions, you will also lose the tax relief you’d have received on your contributions. If you’re a higher- or additional-rate taxpayer, this means that you could be losing a significant sum that would ordinarily boost your pension fund.

3. These small reductions will likely have a big impact later

When it comes to pensions and retirement, even a small reduction in your contributions now could have big consequences later on.

Insurer Aegon reports that a one-year pension contribution break could mean a 25-year-old on average earnings, and contributing the minimum auto-enrolment amount to their pension, could miss out on £4,600 at State Pension Age.

In addition, the insurer warned that a one-year break would also mean missing out on £683 of contributions from their employer, warning that “forfeiting these valuable contributions effectively means you lose out on ‘free’ money from the employer”.

Steps to take instead of cutting your contributions

Pausing or reducing your pension contributions could mean you lose the valuable additional contributions made by your employer and generated through tax relief, and it could mean a substantially lower pension pot when you come to retire.

So, if you are looking at ways to cut your household expenses, here are some options.

1. Recalculate your budget

Budgeting is one of the cornerstones of good financial planning. So, it could benefit you to sit down and work out an accurate household budget, taking into account the rising cost of goods and services, and the lower income you may be earning after recent tax rises.

For example, you may find direct debits for TV streaming or gym services you no longer use. You may also find that there are cheaper options for things such as your car or home insurance.

2. Talk to your employer

If you’re concerned about money and are considering stopping your pension payments, it might be helpful to speak to your employer about reducing your payments rather than stopping them altogether.

Also, your employer may have other schemes and ideas that can help you financially, to protect your pension contributions.

3. Seek professional pension advice  

Before you make any decisions about your pension payments, you may benefit from speaking to a financial planner.

For example, we can help you work out what income you’ll need to achieve your desired lifestyle in retirement, and consequently what you need to be contributing to your pension now to reach your goals.

Get in touch

To discuss your pension payments and to formulate a plan based on your individual circumstances, please contact us via email info@investmentsense.co.uk or call 0115 933 8433.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.