Don’t abandon your pension as prices rise

The rising cost of living may have you thinking about ways to put more money in your pocket, which could include stopping paying into your pension for a while.

Our survey¹ of 1,000 higher-rate taxpayers found nearly a third (29%) are likely to reduce their pension contributions, investments or cash savings in the next 12 months. This is despite respondents saying their number one financial concern is “having a pension that will last”.

While a pause in your pension contributions might not seem like a big deal, our calculations show it could have a significant impact on how much money you have at retirement.

Read on to find out what the research means for you, and why abandoning your pension should be considered a last resort.

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How much would halting my pension contributions cost me?

Our research show that if someone ceased pension contributions for just three years, their pension pot at retirement could be worth nearly £50,000 less.

The analysis shows that if a 25-year-old earning £27,000 a year before tax made combined (personal and employer) pension contributions of 8% of salary over their career, their pension at age 67 could be worth £581,474. This assumes an annual investment return of 5% after charges but before inflation, and that they receive yearly pay rises of 1.5% as well as intermittent salary increases in line with promotions.

However, if they ceased pension contributions at age 40 for three years, their pension could be worth £533,816 at age 67 – that’s almost £50,000 less.

Pausing contributions for only one year could knock £16,400 off the future value of their pension pot, while a five-year gap could cost nearly £77,000.

These are significant sums of money, which could have a big impact on your quality of life in retirement.

Why are pensions such a good method of saving?

The reason why pensions are such an efficient way of saving for retirement is that you benefit from tax relief on personal pension contributions. If you’re a higher-rate taxpayer, this effectively boosts your contributions by 40%². A £1,000 gross pension contribution would cost a higher-rate taxpayer £600, with the other £400 coming from tax relief. By pausing your pension contributions, you’d miss out on this free money from the government.

If you’re a member of a workplace pension scheme, you’ll also receive employer contributions. These will be halted if you stop paying into your pension, even if it’s only a temporary measure.

When you add in the potential investment growth you’d forgo, it’s easy to see why stopping pension contributions should be considered a last resort.

How can I mitigate the impact of rising prices?

In a time of sky-high inflation, it’s more important than ever to ensure you have a robust financial plan in place. While cash might be tighter than usual, think very carefully before making any changes to your saving and investing habits, as a rash decision could prove costly.

One way to mitigate the impact of rising prices on your finances is to make sure your money is working as hard as it should be. Speak to a financial adviser about whether it makes sense to move excess cash savings into a pension; consider switching to a different pension plan with lower charges; and check that your pension and other savings are invested in a way that offers the opportunity for long-term growth.

Next steps

If you’re unsure where you should be investing or how to organise your finances tax efficiently, speak to a financial adviser. By understanding you, your financial circumstances and your goals, they’ll be able to advise on the right investments and savings pots for you, so you can feel confident you’re doing the right thing with your money. For smart advice that’s tailored to you, speak to one of our advisers today.

 

¹ Find Out Now survey of 1,000 higher-rate taxpayers, August 2022

¹ Basic rate tax relief is added to your contribution while higher rate tax relief must be reclaimed through your self-assessment tax return.

 

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The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.