In light of Pension Awareness Day 2023 (September 15), Prime Wealth is urging everyone to think long-term and protect their pensions during the cost-of-living crisis. If you have paused your pension contributions, or are considering doing so, there are implications to be aware of.

 

How is the cost-of-living crisis impacting pensions?

Research shows that the cost-of-living crisis has forced people to make snap decisions about where they can save money, including looking at their pensions. However, our managing director, Glen Callow, at Prime Wealth, said that while 2023 has been an incredibly difficult financial year, due to bills rising and real wages falling, he has warned that pensions should be the last thing to go in a cost-of-living crisis.

 

Should I pause my pension contributions?

Ahead of Pension Awareness Day 2023, Hargreaves Lansdown¹ has released new research revealing that more than a fifth of UK adults have reduced or stopped their pension contributions due to the cost-of-living crisis. Its survey found 14 per cent have stopped pension contributions, while eight per cent have cut back, as they cannot currently afford to save for their retirement. Men and young people are the groups that are most likely to stop or reduce their contributions; almost a third of 18 to 34-year-olds have, compared with just one in five 35 to 54-year-olds.

The figures have increased dramatically in the last 12 months, as only five per cent² of UK adults had stopped contributing to their company pension in 2022 due to the cost-of-living pressures, with a further six per cent actively thinking about pausing their pension contributions.

Glen said: The implications of pausing pension contributions should always be considered when it comes to cutting costs.

Pensions are a goldmine for securing a safe and secure financial future, not only because of the money you invest but the free money and tax-free relief you receive through it.

Glen said while lowering contributions may seem like a quick win to get some extra cash, there are three main reasons this may not be the right decision:

Free money

He said: Pension contributions are simply money you earn today, put aside for the future in the shape of a tax-free pension fund. If you work within a company, individuals will pay on average five per cent of their salaries with employers contributing three per cent; equally free money.

All this money is entered into a capital gains and income tax-free environment. When you reach the age of 55 or 57, depending on when you were born, you can withdraw 25 per cent tax-free, with the remainder subject to income tax as this becomes your salary'.

Tax relief

The effect of tax relief is often misunderstood. A base rate taxpayer effectively receives a 25 per cent uplift versus non-pension saving and for a higher rate taxpayer, this is 66 per cent. Any personal investment paid after income tax would have to work very hard to catch up.

Lost investment and effects of government help

Pausing pension contributions will have huge effects on compound interest, which is the result of receiving growth on your previous year's growth.

By stopping pension contributions for a sustained period of time, your pension savings would not only miss out on the contributions you make during the period, but would also miss the benefit of any growth achieved over the future years and the subsequent compounding of that growth. 

Albert Einstein once said, Compound interest is the eighth wonder of the world. He who understands it, earns ithe who doesn'tpays it'.

 

What is a pension shortfall?

Regular contributions increase the size of a pension pot, which attracts interest. This interest is reinvested and will go on to attract more interest, making more money for the individual.

Without regular contributions, a person is likely to experience a pension shortfall.

With life expectancies growing, Glen said that along with years lived with ill health, pensions and a financially secure future have never been more important. Pausing pension payments could cause irreparable results for retirement, which can span for nearly three decades of a person's life.

He said it is vital for individuals to think long-term when it comes to trying to implement savings as costs across the board continue to soar.  

He added: Consider how much harder your savings would have to work should they be depleted by tax both initially and throughout the life of your pension!

Contact our team for pension advice or read the latest research on the gender pension gap.

 

¹ More than one in five Britons have cut pension payments in living cost crisis, The Guardian, 4 September 2023

² One in 20 pausing pension contributions amid cost-of-living crisis, Pensions Age, 3 August 2022

About the Author: Glen Callow

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