Don’t let a career break derail your finances

A career break can be really fulfilling, enabling you to spend more time with family and pursue interests outside of work. However, without careful financial planning, it could reduce the future value of your pension pot, meaning you might struggle financially further down the road.

Whether you’ve taken time off to care for your children or other loved ones, travelled the world or volunteered for a charity, it’s really important to consider ways of getting your pension back on track. Pensions might not be at the top of your to-do list, but taking action today could make a big difference to you and your plans for the future.

Read on to find out what you can do to prevent a career break from derailing your finances.

How much could a career break cost me?

Considering many of us will have a career lasting around four decades, taking a few years out of work might not seem like a big deal. Over the long term, however, the impact on your pension could be significant. If you took, say, three years out of work, you’d not only miss out on three years’ worth of pension contributions, but you might also suffer a delay in promotion-linked pay rises. Given that workplace pension contributions are typically linked to earnings, a lower salary will generally mean less money going into your pension pot.

Our research shows that if a 25-year-old earning £27,000 a year before tax made pension contributions averaging 5% throughout their career, their pension could be worth just over £360,000 at age 67. This assumes an annual investment return of 5% net of charges and before inflation, and that they receive yearly pay rises of 1.5%, as well as intermittent salary increases in line with promotions and career progression.

However, if they took a three-year career break at age 30, didn’t make pension contributions over this period, and experienced a five-year delay in promotion-linked pay rises, their pension pot could be worth around £290,000 at age 67 – that’s £70,000 less.

Bear in mind that a career break could also affect your eligibility for the state pension – you currently need 35 years’ worth of national insurance contributions to qualify for the full rate.

What does this mean for my retirement?

Without careful financial planning, a break in your pension contributions could affect your future financial wellbeing.

According to the Pensions and Lifetime Savings Association’s latest figures¹, the average single person would need £20,800 a year to fund a ‘moderate’ retirement – this includes things like a two-week holiday in Europe, a long weekend in the UK, and spending £30 on each birthday present every year. Our analysis shows that if you had a £360,000 pension and started withdrawing £20,800 a year, your pot would last until age 91 (assuming withdrawals subsequently increased with inflation).

In contrast, if you had a £290,000 pension and withdrew the same amount, your pot would only last until age 85. Unless you made large cutbacks, you’d have a much higher risk of running out of money in retirement.

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How can I boost my pension?

This might seem a bit doom and gloom, but the good news is you can still boost your pension and increase your chances of a fun and fulfilling future.

If you haven’t started your career break yet, then one option to consider is to try to keep paying into your pension. Thanks to investment growth and compound returns, relatively small pension contributions could make a big difference to your future. For example, if the individual above paid £600 a year into their pension during their three-year career break (the equivalent of £50 per month), their pension at retirement could be around £10,000 greater than if they didn’t make any contributions at all.

Alternatively, you could try to increase your pension contributions once you’ve returned to work. If the same individual increased contributions from 5% to 10% at age 40 onwards, then instead of a £290,000 pension pot at age 67, they could be on course for a pot worth around £470,000. This assumes the same 5% annual investment return net of charges and before inflation.

Making larger pension contributions might seem impossible right now, but creating a budgeting and savings plan with the help of a financial adviser is a great place to start. Combing through your incomings and outgoings will help you understand your financial position and determine where savings could be made. It may be the case that small changes, like switching to a cheaper TV package or cancelling unused direct debits, could free up money to save for your future.

Some other steps to consider include diverting bonuses into your pension, and making sure your contributions increase in line with any pay rises you receive.

Next steps

It’s easy to stick your head in the sand when it comes to pension saving. Yet putting a solid plan in place today could make a real difference to your future finances, and it’s even more important if you’ve got a gap in your pension contributions. It isn’t something you want to get wrong, which is why it’s important to get some really good financial advice. Take control of your finances by speaking to one of our financial advisers today.

¹https://www.retirementlivingstandards.org.uk/

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.