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3 reasons cutting your pension contributions now could have a significant impact on your retirement
When you’ve been working for decades, retirement is something that you are no doubt looking forward to. You’ll have grand ideas of everything you want to do – whether that is extensive travel, setting up your own business, or spending more time with loved ones.
That said, the cost of living crisis has led to many UK adults attempting to cut costs wherever possible.
Indeed, PensionsAge reports that 51% of employers have received requests from employees to reduce their pension contributions and 47% of employees have requested to stop contributions altogether.
A report by Standard Life also highlights that 56% of households that earn more than £100,000 said they would need to cut back on spending, so even higher earners are attempting to mitigate the soaring cost of living.
Read on to find out three reasons why reducing or pausing your pension contributions could result in a significantly lower pension pot and affect your lifestyle during retirement.
1. Your pension could be reduced by thousands, or even hundreds of thousands, of pounds
While the current cost of living crisis might make it incredibly tempting to reduce your pension contributions, doing so now could cost you more in the long run.
It might not seem like it initially but, by the time you retire, pausing contributions now could result in a significant shortfall.
A report by Standard Life highlights that a 35-year-old opting out of contributing to their pension pot entirely for one year could see them miss out on up to £12,000 when they retire. Alternatively, opting out for three years could see that 35-year-old missing out on up to £37,000.
Of course, this is just from reducing your payments for a short period. Pausing all pension payments entirely could see you missing out on tens or hundreds of thousands of pounds by the time you choose to retire.
You’ll also miss out on help from the government if you reduce or stop your pension contributions. When you pay into a workplace or personal pension, the government gives your savings a boost by way of tax relief.
Similarly, you will potentially miss out on any employer contributions too if you decide to reduce, or stop, your workplace pension contributions.
2. Stopping pension payments now may mean working longer
While it might be tempting to stop paying into your pension now to provide you with a little extra funds to pay that last monthly bill or balance your budget a little, doing so might lead to you having to work longer before you eventually retire.
Not only could cutting pension payments reduce what you are able to do financially when you retire but it could also mean you have to spend years more in work trying to build your pension pot to your desired level.
Working with a financial adviser can help. We can help you work out exactly what you may need to fund your ideal retirement and create a plan that’s tailored to your current and future financial circumstances.
In fact, a report by Standard Life highlights that UK consumers that worked with a financial adviser felt like they could retire three years earlier on average than those who hadn’t received advice.
3. Relying on the State Pension might not be enough
While the government does provide some support for retirees, ranging from help with TV licences and winter fuel to concessions on travel, simply relying on your State Pension might not be enough to cater for the retirement lifestyle you have in mind.
If you reduce your workplace or personal pension payments, or even stop them entirely, you may have to rely on the new flat-rate State Pension that pays just over £200 a week (2023/24) or £10,000 a year, which is lower than the National Minimum Wage.
Depending on your plans for retirement, that pension might not be enough for you to meet your goals, which is why it’s important that you seriously consider whether the additional short-term benefits of reducing your pension payments are worth the long-term impact on your retirement.
We can help
If you’re concerned about maintaining your pension contributions in the present economic climate, talk to us.
We can help you to review your budget and find ways to ensure you can maintain your standard of living now while also ensuring you’re saving enough for the future.
Talk to us by calling 0800 434 6337.
Please note:
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.