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Should I stop my pension contributions to save during the cost-of-living crisis?

It is hard to talk about money at the moment without mentioning the cost-of-living crisis and the impact it is having on individuals, businesses, employers and employees. Many people are wondering how their investments may respond.

Another question on people minds is how the market fluctuations will affect the amount of money you may have at retirement, and therefore the living standard or lifestyle you will have when you get there.

When we come into periods where many are feeling a financial strain, people often look to reduce their spending in order to increase their level of disposable income. It is a good exercise to sit down and work out how much money you have coming in against your monthly expenditure to identify any costs that you could cut. For example, there may be monthly subscriptions you do not need, or memberships that you are no longer using.

As part of this exercise, some people may be tempted to pause their pension contributions as they are more focused on their current needs than their income at retirement. Whilst this is a completely personal choice, we strongly suggest that you take a long-term view on all investments, and pensions are no different. However, if you are seriously considering this as an option, it is important to think about how it may affect your future.

Firstly, if you do stop saving into your pension it can be very difficult to then resume your contributions. Whether you forget about it, put it off for too long, or fear reducing your income, it could prove quite challenging to get back into once you have stopped.

A good point to note is that – as part of Auto Enrolment regulations – you are automatically enrolled into your employer’s workplace pension scheme every three years, in line with their pension duties. Therefore, once you have stopped saving you will eventually be re-enrolled, however, this could be as long as three years down the line, depending on where this happens within your employer’s auto
enrolment requirements.

It is also important to consider any additional benefits you will be missing out on if you opt out of your workplace pension, including your employers’ contributions. For example, based on the scenario below, if you were earning £30,000 per year with an employer contribution of 3%, you would be missing out on an additional £900 from the business each year you do not save into your pension. Furthermore, your pension is an investment which will grow over time and therefore you will see less of a return as it grows if you stop saving into it. Based on the example above in table one, this individual would be missing out on £7,784 in their pension pot for simply stopping their monthly contributions for one year.

With such a significant amount of money at stake, we would strongly encourage people to remain invested in your pension during to ensure you have the provisions you need at retirement.

That said, we do understand that it is an incredibly difficult time for many people, and it may be that you need to make hard decisions now to meet your other financial obligations. However, we wanted to highlight that this is not a decision to be taken lightly and ensure that you understand the impact this may have on your financial future.

Annual Salary 30,000
Employer Contribution 3% (£900)
Employee Contribution 5% (£1,500)
Total savings lost per annum £2,400
Cost to employee (after tax relief) £1,200 (£100 pm)
Value of £2,400 after 30 years (assuming 4% return pa) £7,784