Keeping up pension contributions can be a challenge, especially at the moment when many of us are finding it hard enough just to cover our living costs.
You may be thinking about pausing, or reducing your pension contributions so that you can use the money to help you make ends meet during these difficult times. Around 13% of people who are saving into a pension scheme have reduced their contributions in the past 12 months, while 7% have stopped paying in completely, according to research by the Pensions Management Institute (PMI). However, while pausing contributions might be tempting if you need a cash boost, it’s important to think about the longer-term impact this could have on your retirement pot.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Here, we look at some of the things you need to consider if you’re thinking about temporarily stopping your pension contributions to help pay rising household bills.
The rules
If you’re paying into a workplace defined contribution pension, you can choose to pause your contributions whenever you want if you wish. You’ll need to request a form from your pension provider to stop paying into your scheme, and complete this. If you stop paying into your pension by opting out within a month of being auto-enrolled into the scheme, any money you have contributed will be refunded (after employer contributions). Read more about how workplace pension schemes work in our article How does pension auto-enrolment work?
You can choose to pause your workplace pension contributions for up to three years, after which time you’ll be automatically enrolled into the pension scheme again. However, you can request to start contributing to the pension again at an earlier stage by speaking to your employer and opting back in. Bear in mind, though, that your employer is only obliged to deal with requests to opt back into the pension scheme once a year, typically at the start of the tax year in April. If you are pausing contributions because you really need the extra cash to help with living expenses, speak to your employer to make sure you can start paying in again as soon as this is affordable.
If you’re paying into a personal defined contribution pension scheme, it’s up to you how much you contribute and whether you choose to continue doing so, or if you want to stop for a period of time. Read more about this type of pension in our article How private pensions work.
You can usually withdraw money from your defined contribution pension once you reach the age of 55 (rising to 57 in 2028). However, many people continue to pay into their pension long after this age and into retirement to give themselves the greatest chance of building a big enough pot to last the rest of their lives.
What you should consider
If you have a defined contribution pension and you want to pause contributions to help make ends meet, there are various things to think about first.
You need to save enough for retirement
If you’ve been saving into a pension for many years, you may feel relatively confident that you’ll have enough to live on in retirement, but in reality, people need much more than they think.
The State Pension rose by 10.1% (in line with September’s inflation figure) on 6 April 2023, so those receiving the full new State Pension, will get £203.85 a week in the current 2023/24 tax year, up from £185.15 in the 2022/23 tax year. If you retired before 6 April 2016, the most you can get from the basic State Pension in the 2023/24 tax year is £156.20, up from £141.85 a week in the 2022/23 tax year.
The State Pension age is also rising, and you won’t receive this under current rules until you reach the age of 66, rising to 68 in 2028. You’ll therefore need other savings in place if you want a comfortable retirement, or to stop work before your mid-sixties.
Rising prices have pushed up the minimum income level you’ll need for a minimum standard of living in retirement by almost 20% compared with a year ago, according to the Pensions and Lifetime Savings Association (PLSA). The PLSA’s Retirement Living Standards report found that the cost of a minimum standard of living in retirement has increased from £12,800 to £14,400 in 2023 for a single person, and from £19,900 to £22,400 for a couple.
The amount of income needed for a moderate standard of living in retirement has increased from £23,300 in 2022 for a single person to £31,300, the PLSA said, and from £34,000 to £43,100 for a couple. This includes the cost of running a car, longer holidays abroad and increases the amount spent on basics such as food. Read more in our article £12,800 annual income now needed to retire, say pension experts.
Paying less into your pension now may ease financial pressures that you’re facing now, but it’ll mean you’ll probably have less in your retirement pot when you need it.
You can use a pension calculator to see a forecast of the pension income you’re likely to get when you retire, based on the current value of your retirement savings.
You’ll miss out on valuable tax relief
One of the major advantages to paying into a pension is the tax relief you receive on contributions. This essentially means that some of the money that you would have paid in tax to the government goes into your pension instead. Basically, when you or your employer pays into your pension, the government will contribute too.
You’ll automatically get tax relief on pension contributions at the basic rate of tax which is 20%. So, if you wanted to add £100 to your pension, you’d only need to pay in £80, as the government would add the £20 it took in income tax. If you’re a higher rate taxpayer who pays income tax at a rate of 40%, you can claim even more pension tax relief back, so paying £100 into your pension will cost you just £60. Read more in our articles How pension tax relief works and How do I reclaim higher rate pension tax relief?
You’ll miss out on employer contributions
On top of your own contributions into a pension, you’ll get a contribution from your employer if you’re paying into a workplace pension. Alongside tax relief, your employer’s contributions can significantly increase the value of your pension.
If you pause your pension contributions you’re essentially turning down free money from your employer for a period of time. Under current auto-enrolment rules, your employer must contribute at least 3% of your qualifying earnings, but they may pay more. Employer pension contributions are one of the huge advantages of a workplace pension scheme that should ideally be made the most of.
You’ll need to restart your contributions
Once you’ve stopped paying into your pension scheme, it can be hard to know when to restart your contributions. This could cause some anxiety, as it’s unlikely that living costs will plummet anytime soon.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “There is also the potential that if you cut or stop your contributions then you may forget to start them up again and this could have a big impact on how much you end up with in retirement.
“Under auto-enrolment you will be re-enrolled every three years which is good but ideally you would not want to take such a long break from contributing. If you have reduced your contributions then there’s also the potential you may forget to boost them again. It is important to make a note to keep checking your pension and resume or increase your contributions as soon as things get a bit easier.”
You could miss out on valuable stock market returns
Seeing the value of your retirement savings fall during turbulent economic times can be worrying, and it could make you reluctant to continue contributing when you’ve other bills to pay. However, pausing your pension contributions could prove a costly mistake, particularly when the market is down. You’ll probably have to pay in more to build the same retirement pot, and you risk missing out on a market recovery that could significantly boost your pension.
Bear in mind that by paying into your pension regularly, you can help smooth stock market volatility, as you buy more investments when markets are lower and fewer when they rise. The more you invest when markets are down, the greater your potential gains when markets eventually recover.
Remember that your pension contributions also benefit from the magic of compounding over time. This essentially means that investment income is reinvested to generate more income and gains grow on top of gains over the years.
How much difference will it make to your pension if you stop contributing for a year?
You may think that it won’t make much difference to your pot if you stop paying into your pension for a year or two. However, every year that you save into a pension can make a big difference to the overall amount you end up with at retirement.
For example, a 55-year-old earning £30,000 a year who contributes 8% of their total salary to a pension, could end up with a pension worth about £46,000 by the time they reach age 67, assuming that their salary grows by 2% per year and investment growth of 4% per year. However, if they put off contributing for one year to meet living costs, their pension would be worth around £42,000 at retirement, a difference of £4,000. If you’re considering pausing your contributions, it’s therefore worth looking at ways you might be able to reduce some of your other outgoings, to see if you can make ends meet another way.
What can you do instead of stopping pension contributions?
Instead of pausing your pension contributions, you could consider talking to your employer to see if you might be able to reduce the amount you pay into your pension. You may be able to pay less while your employer maintains their contributions, for example, but this depends on your particular scheme’s rules. It’s worth talking to your employer and explaining your circumstances to see if they can offer a solution.
As mentioned, you might also want to look at ways you can cut costs and boost your income. Our articles 21 ways to cut costs and 27 frugal living tips have lots of suggestions that may help you reduce your outgoings.
Tom Selby, head of retirement policy at AJ Bell, said: “People struggling to meet the cost of living as inflation soars should go through their household budget with a fine toothcomb to make sure weekly and monthly savings have been exhausted before considering pausing pension contributions. You should also be clear about the impact of that decision.
“If you feel you have no option but to quit your pension scheme, make sure you’ve got a plan in place to rejoin once your financial circumstances improve.”
Where to go for further help
It can be a struggle finding enough income to cover all your bills alongside keeping up with your pension contributions, but it’s important to know where you stand.
If you’re 50 or over and have a defined contribution pension, you can get free guidance on the options available to you from the Government’s Pension Wise service.
However, if you want personal recommendations or advice about your specific circumstances, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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