Immediate gains, long-term losses

The high price of halting pension contributions

In times of financial stress or uncertainty, it may be tempting to hit pause on your pension contributions. However, before you do so, it’s essential to understand the long-term implications this decision may have on your retirement savings plan.

Decisions to increase short-term income can dramatically affect future wealth. It may seem like a viable solution to current financial struggles to reduce or stop pension contributions. However, this short-term increase in take-home pay can significantly impact long-term pension values. Higher earners stand to lose almost four times as much.

Tax relief advantage

Pension contributions attract tax relief. Research of a worker earning £35,000 annually and saving 5% in a workplace pension scheme matched by their employer, if they stopped paying into their pension, their take-home pay could increase by £117 monthly or £1,404 yearly[2]. But, they would lose £341 monthly or £4,092 yearly in pension savings due to lost matched contributions and tax relief.

Magic of compounding

Pension wealth hugely benefits from compounding – the longer money is invested, the more it could grow. In 20 years, the £4,092 could have boosted the pension pot by £10,575 through investment growth if contributions hadn’t been paused.

Impact on higher earners

For higher-rate taxpayers earning £70,000, the difference is even more significant. They could increase their take-home pay by £3,360 yearly by stopping 8% matched pension contributions. However, their pension pot would be worse off by £12,192 in that period. Their pension savings would also be worse off by a projected £31,508[3] in 20 years if they had not taken a one-year pause.

The toll on personal finances

The research involving over 6,000 UK adults shows that the past two years have strained people’s finances. A third (33%) of workers across all age groups confessed to decreasing or stopping their pension contributions. Among younger workers, the figures are even more alarming – nearly half (49%) of workers aged 18-34 are looking at the impact of adjusting their pension contributions.

Cost of opting out

Exiting your savings scheme means forgoing the benefits of saving through a workplace pension. Initially, you’ll miss out on your employer’s contribution. Any breaks in savings could also delay your retirement or mean you’ll have less income when you stop working. Catching up on any breaks will mean saving even more when you resume to achieve your desired lifestyle in retirement.

Weighing up the decision

While the number of people opting out of schemes remains relatively low, it’s clear that many have considered the option in a bid to boost their take-home pay. However, the decision to pause pension contributions must be weighed carefully, especially for those at the start of their career.

Short-term gain, long-term loss paradox

Stopping or reducing contributions might be necessary for some, but decisions mustn’t be taken impulsively. Figures from the research show that the money gained in the short term doesn’t seem like great value when compared to what’s being given up in the long term.

Source data:
[1] Royal London commissioned a survey by Opinium between 1 and 8 August 2023, with a sample of 6,003 nationally representative UK adults.
[2] £1,404 per annum saving for a worker aged 40 earning £35,000 and previously contributing 5% of their salary to their pension.
[3] 20-year projection, based on a 5% investment growth net of charges.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE. A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.