The importance of maintaining payments into your pension during the current cost of living crisis cannot be overstated.
If you knock them on the head then, taking into account employee contributions and tax relief, you are in effect throwing away free money.
Nevertheless, there are those who unfortunately see no other way out.
A trend that is something of a disaster given the fantastic success automatic enrolment has proved for millions of citizens.
The question is – will the trickle become a flood?
Research from the Pensions Management Institute (PMI) has spooked the sector.
Based on a Censuswide survey of 2,000 working people, covering those saving into a pension scheme over the past 12 months, 13 per cent had reduced their contributions and seven per cent pulled out entirely. A further 20 per cent were considering ceasing funding their pension pots.
PMI president Sara Cook, said: “The pressures of meeting short-term needs for cash have forced many people to make decisions which could have serious implications for their longer-term financial security.
“A significant proportion of the general public is saving at rates that are lower than they were 12 months ago. They are aware of the impact this will have but feel that they have no alternative. By reducing or stopping contributions altogether, savers will be subject to a ‘double whammy’ in that they will not enjoy the benefits of tax relief or employer contributions.
“It is tragic that all the good achieved by automatic enrolment over the last decade might be undone by desperate people being forced to make short-term decisions at the expense of their longer-term security.”
Automatic pension enrolment rules, introduced in 2012, mean businesses must ‘opt-in’ new employees who are over a certain age and salary. So far it has meant 11 million starting saving for retirement, with only ten per cent opting out. If you pay income tax at the standard rate, then you get 20 per cent relief, pro rata if your earnings and tax are higher.
Figures from Standard Life indicate that someone who began on a salary of £25,000 per year and paid the standard monthly auto-enrolment contributions (three per cent employee, five per cent employer) from age 22 would have a total retirement fund of £456,893 at 68. However, halting pension contributions at 35 for just one year, would result in a total pot of £444,129 – almost £13,000 less.
Jenny Holt, managing director for customer savings and investments at Standard Life, said: “If possible, the first port of call should be to reduce spending – for example cutting back on unnecessary purchases and shopping around for better value deals. Doing this, rather than making decisions that will affect future finances such as reducing or stopping pension contributions, even if for a short period only, will be beneficial in the long term.”
So, eating out less, fewer holidays and reduced energy usage.
Aegon analysis shows even a one per cent reduction in personal contribution rate or three-year ‘pension pause’ could have a significant long-term impact on retirement income. For a 25-year-old employee on average earnings, paying six per cent in personal contributions and receiving four per cent from their employer, stopping contributions to their pension entirely but starting up again after three years at the previous contribution level, could mean £15,500 less at state pension age. This assumes, as is highly likely, their employer also stops contributions.
Steven Cameron, pensions director at Aegon, commented: “The power of compound investment growth means it’s the pension contributions paid in the early years that have longest to grow and make the biggest difference in ultimate retirement income.”