If you are struggling financially at the moment it can be very tempting to either reduce or completely pause your pension contributions, afterall, you can always make it up later – can’t you?

The truth is, no, not always and the impact on your retirement income could be significant, especially given the rise in the average life expectancy we have seen over the last few years.

Few things to remember:

  • Your pension contributions are subject to tax relief. If you suspend payments, you will probably end up paying more in Income Tax and National Insurance, so the increase in your take home pay will be less than the actual pension payment.

  • If you are employed and suspend your contributions, your employer may also stop paying into the scheme on your behalf.

  • Whilst your pension fund will remain in place for you to access when you retire, without regular contributions, you may find that the annual maintenance charges further restrict your fund growth.

  • Check your pensions Terms and Conditions and get advice before you pause or cancel – you may not always have the option to restart.

Potential Impact

In December 2020, pension provider Aegon analysed the impact on a pension fund, for a 25 year old with average earnings of £27,000 p.a. based on 3 scenarios:

  1. A 3 year contribution break
  2. A 1% reduction in personal contributions
  3. A 1% reduction in personal AND employers contributions

Even this ‘short’ break could reduce the final pension fund by up to 18%

Pension Contribution Pausing Impact

So What Can You Do Instead?

1) Take stock of your monthly income and expenditure

  • Are you paying for items you no longer require?
  • Do you have any subscriptions you could cancel (magazines, mobile apps, TV apps)?
  • Could you restructure your debt (consolidate, reduce interest rates, balance transfers)?
  • When did you last review your utility bill contracts?
  • Could you cut back on any luxury items?
Tax Planning - ISAs

The average household saves at least £100 a month by conducting a review of their outgoings but many, especially if they have never done this exercise, can save a lot more.

This saving alone could be enough to prevent the need to change your pension contributions and even free up more!

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2) Declutter!

Many of us have unwanted items around the house that we no longer use or need.  Here are a few ideas:

  • DVDs / CDs

  • Mobile Phones & Other Tech

  • Games & Toys

  • Gadgets

  • Fitness Equipment (you know, that treadmill that you are using as a clothes stand)

  • Bikes (especially kids ones)

  • Clothes / Furniture (both these tend to sell well as upcycling projects)

Remember to clean them & take good photographs to enable you to advertise them in local Facebook groups, free to sell Apps, or on Ebay.

In Summary

You may find yourself in a position where pausing or reducing your pension payments is your only choice. If this is the case, then set yourself a goal to restart as soon as possible – your older self will definitely thank you. The longer you leave it, the bigger the impact will be on your future retirement pot and therefore your income.

Remember, when it comes to pension contributions you need to take care and there well be other many areas to explore. If you would like to book a free 30 minute chat, please click the button below, or contact Tony Thomas on 07585 592494 or tony@ttwealth.co.uk

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