At a glance
- When money’s tight, pausing future savings plans such as pension contributions may seem like a good option – but it can have significant long-term implications.
- By cutting back or even cutting out pensions contributions completely, you’ll be missing out on the tax benefits and possibly also employer contributions – as well as the effect of compounding.
- Financial advice can help to develop a plan to manage your short-term needs without impacting your future financial wellbeing.
The immediate cost of living crisis now looks like it’s behind us. Although inflation is now down to just over 2%, consumer prices remain high, and many households are still keeping a tight rein on finances. According to the Scottish Widows Retirement Report 2023, 75% of the population remain concerned about making ends meet and the number of those reducing their pension or savings contributions, has risen to 13%, up from the latest figures available in 2023.1
“We’re not out of the woods yet,” says Tony Clark, Senior Propositions Manager at SJP. “But if you’re looking at where you could make savings, pausing your pension should be one of your last resorts. You could lower your contribution, or look for other smaller economies you could make, before pressing pause on your pension completely.“
Should I ever pause pension contributions?
On the face of it, taking a break from paying into your pension can look tempting. After all, pension contributions aren’t mandatory in the UK, and it could be decades before you need to access your pension savings. So, when financial pressures are intense and you’re struggling to meet basic household costs, it is one of your options in the short term but it’s important to know all the facts.
While reducing the amount you pay in – or stopping altogether – might make it easier to meet certain short-term needs, it’s a choice that could significantly impact your standard of living later in life, when you have fewer other options open to you.
What are the disadvantages of stopping pension contributions?
There are several downsides to pausing contributions, and it might be a more detrimental choice than it first appears.
For one thing, it means that you no longer benefit from the tax relief that the government pays on those contributions. That relief is currently 20% for basic rate taxpayers, 40% for higher and 45% for additional taxpayers. You may also be missing out on the top-up payments that many employers add to employee pension plans.
“If you’re employed and you and your employer both pay in, be aware that if you reduce the amount you pay in, your employer contributions may scale back too – and that could have a bigger impact on your future pension,” says Tony.
Losing out on compound interest
In addition, the money you contribute to a pension benefits from the power of compounding. This is the snowball effect that occurs when any growth in the investments held in your pension goes on to generate its own growth.
If you stop your contributions entirely, the value of your pension isn’t just affected by the loss of the money paid in, but also a potentially significant level of investment growth. So you may be losing out on more than you realise.
Reach out to your family for support
Money worries can be a sensitive subject to broach with family, and people often shy away for fear of being blamed for poor money management. But starting the conversation about money worries means you can ask if someone else could help out during a tight period. The rest of the family may be more aware of issues than you know, and sympathise, – but not know whether an offer of help would be welcome.
“Help and support doesn’t always have to be financial,” Tony adds. “It could be offering more childcare or picking up the cost of after school clubs. Or, looking in on parents regularly to lend a hand with gardening and looking after the house.“
If you’re the one lending a hand, however, you need to be sure that you’ll be able to sustain that support for as long as it’s needed, without damaging your own financial wellbeing too.
Finding the right balance
Given those longer-term consequences, it’s worth asking yourself if pausing your pension contributions is the best way to ride out a short-term squeeze on your finances.
“Have a look at your total outgoings first, because there may be areas where you can cut spending that perhaps you hadn’t identified before, especially if you pay for a lot of things by direct debit,” suggests Tony.
In many cases, savers pause or reduce their contributions with the intention of it being a temporary arrangement. But that pension ‘holiday’ can easily stretch into a much longer period of time – even if financial pressures ease.
The longer you leave it, the harder it is to make up the shortfall.
Five money-saving measures when times are tight
- List all your direct debits, subscriptions and memberships and pause or cancel any that aren’t essential.
- If your insurance or an annual premium is up for renewal, shop around for a better deal.
- Check whether you’re paying too high a price for your energy or your broadband.
- Do you have a spare room you might rent out? Or a hobby or skill you could make a little extra money from?
- Reach out to your family for support – whether financial, a small gift or loan to tide you over, or practical help.
“Budgeting wisely in more difficult times isn’t all about austerity,” Tony says. “Getting a true picture of where your money’s going each month and making small adjustments will also show you what you can set aside for a few treats. That’s conscious spending, and it’s important for our emotional wellbeing too.
When we spend without realising what we’re spending it on is when we can run into problems.“
Most importantly, speak to a financial adviser before you make any decisions that might impact you or your family’s long-term finances.
Repairing the damage – making up lost ground
So, is pausing your pension ever the right thing to do? Not without taking financial advice and making a financial plan to recover lost ground, according to Tony.
“An adviser can show you the potential impact of reducing contributions in the long term, but also show you what you could do in the medium term to make up for that impact.”
“You can always come back to your pension and pick up where you left off,” he explains. “If you need to reduce or pause contributions for six months to rebalance your finances, the following year you might be able to pay in part of a bonus.“
“That’s a tax efficient way to reboost your pension.”
Invaluable advice for whatever life throws at you
Financial advice can be invaluable in helping you through times of feast, and famine. So, if you do decide to pause pension contributions in the short-term, you can feel more comfortable knowing that you have a plan in place to make it up in a year or two.
Contact us to find out how we can help.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.
Sources:
12023 Retirement Report, Scottish Widows, June 2023 (The survey included general questions on pensions and retirement planning and was carried out online by YouGov Plc: across a total of 5,072 adults aged 18+, weighted to be representative of the UK population.
SJP Approved 30/09/2024