With the cost of living crisis making an impact on almost everybody, you may be looking for quick and easy ways to cut back which won’t impact you as much. A seemingly simple thing to do which you may consider could be to cut your pension contributions. This is advised against, however, as it could seriously affect you in the long run.
The latest Which consumer insight tracker found 59% of people made an adjustment to cover essential spending last month, and 28% were forced to dip into their savings. If you're auto-enrolled into a pension scheme run by your employer, it's likely that at least 5% of your salary is going into your pension.
But although reducing or stopping your contributions could be a tempting quick win for your finances, Which says it will have consequences when you come to retire.
If you are over the age of 22, in full time employment and earn over £10,000 a year, it’s likely you were automatically enrolled into your workplace pension. Auto-enrolment pensions were launched in 2012 and now have a total minimum contribution of 8% of your qualifying earnings. Your employer must pay 3% as a minimum and the remaining 5% is paid by you. Your contribution includes tax relief, so less than 5% will come out of your salary.
You're not legally required to pay into your pension, and your employer can't require you to. If you're self-employed, you're also not required to pay into a pension. But, if you do not contribute anything and just rely on state pension, it is unlikely that you will have enough to fully fund your retirement.
If you reduce your pension contributions, it could impact you in the future more than you think. Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown said people should bear in mind tax relief and employer contributions.
She told Which: “Over time this extra cash can significantly boost how much goes into your pension as well as how much you get at the end.”
If you cut your contributions and don’t pay the 5% minimum, then you may be forfeiting some or all of your employer contributions. Many pay a minimum but they may also pay more to match your contribution.
If you reduce your contributions below 5%, it's up to your employer whether they let you remain in the pension scheme. You could risk losing that 3% employer contribution (effectively 'free money') altogether.
Also, when you save into a pension, the government boosts your pension contributions via tax relief. Self-employed people also get tax relief. This means that money you would have paid in tax on your earnings goes towards your retirement savings instead
If you are a basic-rate taxpayer and contributed £100 from your salary into your pension, it would actually only cost you £80. The government adds an extra £20 on top – this is what it would have taken in tax from £100 of your salary.
Even reducing your pension contribution by a small amount can have a huge impact on your retirement. Pension provider Aegon found a one-year pension break for a 25-year-old on average earnings of £29,000 and contributing the minimum amount in their workplace scheme, would mean they'd miss out on £4,600 at state pension age.
During this period they would forfeit workplace employer contributions worth £683. Their monthly saving from take-home pay would be only £75. If pension payments were paused for two years, this could mean missing out on £9,100 and £13,600 for three years.
Which suggested some tips which you should consider before cutting your pension contributions.
They recommended finding out how much you need to retire, speaking to your employer before making any major changes, and getting free pension advice.
