Why stopping pension contributions could result in a retirement nightmare

Concerned couple looking at laptop

According to the Times, research reveals that 1 in 5 British workers stopped, paused or reduced pension contributions in 2022 to help deal with the surging cost of living. This echoes a study by Aviva that suggested 23% of Britons with pensions could use their retirement fund to provide a financial boost in 2023, which includes stopping contributions.

Furthermore, research by Standard Life shows this could include households with higher incomes. It found that 72% of households with incomes of between £70,000 and £100,000 a year were considering cutting back on spending during these economically challenging times, which again could include pension contributions.

Over half (56%) of those earning more than £100,000 said they may do the same. If you’re one of them, it’s worth remembering that doing so could reduce the value of your pension by more than you think. Read on to discover why this is, and how a financial planner could help.

Pausing pension contributions could jeopardise your retirement lifestyle

According to Standard Life’s study, reducing, postponing or stopping your pension contributions could affect its value even if you stop for a relatively short period of time. To demonstrate this, it calculated the drop in a pension pot’s value where the holder earns £25,000 a year and makes monthly contributions of 3% from the age of 22.

It also assumed that the employer boosted contributions by 5%, an average investment growth of 6.25%, salary growth of 3% and annual investment costs of 1% a year. Based on an average annual inflation rate of 2% a year, Standard Life calculated that the pension would be worth £456,893 when the holder reached the age of 68.

If contributions were stopped at the age of 35 for just one year, the pension pot could drop to £444,129 in value, almost £13,000 less than if contributions had continued. If contributions were paused for two years the pension’s value could fall by around £25,000, and if they were stopped for three years, it could fall by nearly £38,000.

As the calculations are for illustrative purposes only, please do not use them as a guide for your own pensions. That said, they do demonstrate how using your pension to tackle your short-term financial challenges could be extremely detrimental to your financial security in retirement.

The rise in the cost of living could make the situation worse

In 2022, the rising cost of living was hardly out of the headlines, as food, fuel and energy prices skyrocketed throughout the year. This rise in the cost of living is measured by inflation, which the Office for National Statistics revealed stood at 10.5% in December 2022.

If your pension is not keeping pace with inflation, your retirement fund could fall in value in real terms over time.

To demonstrate this you might want to consider the following. If you use an inflation calculator, you’ll see that you needed £203 in January 2023 to have the same spending power of £100 in January 2003.

In other words, your money needed to grow by around 103% to keep pace with inflation that averaged 3.6% during the two decades.

By pausing or stopping your pension contributions you could reduce the growth potential of your pension, which could affect its ability to keep pace with inflation. As such, the real terms value of your retirement fund could shrink, meaning that you may not be able to afford the lifestyle you want when you stop working. Worse still, it could result in your pension pot running dry sooner than expected.

Creating a budget could help with any short-term financial challenges

One way you might be able to deal with any short-term financial challenges could be to re-assess your expenditure, something a financial planner could help you with. A planner could provide a clearer understanding of your spending habits and where you might be able to reduce your overheads to deal with any financial challenges.

This could include helping you create a budget to prevent overspending and identify costs you can cut back on. As a result, you may be able to lower your overheads without affecting your lifestyle or retirement plans.

Furthermore, a planner could help you create a financial strategy that allows you to understand whether your pension is on track to provide the lifestyle in retirement that you want. If it’s not, they can suggest options that could help you achieve it.

For example, if you have a lost pension, a planner could help you find it so that you can boost your retirement fund. According to This is Money, between 2018 and 2022 the number of lost pension pots in the UK surged from 1.6 million to 2.8 million, with an estimated collective value of £26.6 billion – up from £19.4 billion in 2018.

A planner will also be able to provide you with options once you have found your pension. This might include merging it with an existing pension, which may help boost its growth potential while cutting costs.

Please remember that consolidating pensions carries risks, so always speak to a financial planner before going ahead to ensure it’s the right strategy for you.

Get in touch

If you are considering pausing or stopping your pension in 2023, and would like to discuss the risks of doing so and potential options that may be available to you, please contact us on info@janesmithfinancial.com or call 01234 713131.

Please note

This blog is for general information only and does not constitute advice. It should not be seen as a substitute for financial advice as everyone’s situation is different.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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