3 powerful reasons you shouldn’t reduce your pension contributions during the cost of living crisis

Posted on

The cost of living crisis hasn’t been far from the news headlines for a few months now.

Soaring energy costs and a rise in the energy price cap have contributed to the highest inflation rate in 40 years, with the Office for National Statistics confirming the headline rate hit 9% in the year to April 2022.

Add to that rising food prices, an increase in the rate of National Insurance contributions (NICs) and Dividend Tax, and rising interest rates that may have pushed up the cost of your mortgage, and it’s easy to see why millions of households are seeing expenses rise sharply this year.

If you – or perhaps a child or grandchild – are having to make savings, one thought might be to reduce your pension contributions for a spell. However, doing this could damage your long-term security. Here are three reasons why.

1. You could lose matched employer contributions

If you’re in a workplace pension scheme, it’s highly likely that your employer makes contributions to your pension on your behalf. Indeed, by law, employers must pay 3% of your earnings in most cases.

If you decide to reduce or pause your own contributions, you could forfeit your employer contributions. You’ll be at risk of losing that 3% employer contribution altogether – essentially reducing your earnings by 3%.

Aegon analysis published by Pensions Age showed a one-year pension contribution break could mean a 25-year-old on average earnings, and contributing the minimum auto-enrolment level, could miss out on £4,600 at State Pension Age.

And, as well as losing out on their own contributions, Aegon warned that a one-year break would mean missing out on £683 of contributions from their employer, warning that “forfeiting these valuable contributions effectively means you lose out on ‘free’ money from the employer”.

2. You’ll lose valuable tax relief

When you save into a pension, whether through a workplace scheme or into your own pension, the government boosts your pension contributions through tax relief. This is true if you’re employed or self-employed.

What it means is that money you would have paid in tax on your earnings goes towards your retirement savings instead.

The amount of tax relief depends on the rate of Income Tax you pay.

If you are a basic-rate taxpayer and were to contribute £100 from your salary into your pension, it would actually only “cost” you £80. The government adds an extra £20 on top – equivalent to what it would have taken in tax from £100 of your salary.

If you’re a higher- or additional-rate taxpayer, a £100 contribution only “costs” you £60 or £55, respectively. Note that you need to claim this additional tax relief through your self-assessment tax return.

If you pause or reduce your pension contributions, you’ll also lose this valuable tax relief. As with employer contributions, it is essentially “free money” that is going in your pot to fund your retirement. If you cut or pause your contributions, you’ll lose this valuable relief.

3. You’ll miss out on compound growth

Compound growth is essentially “growth on growth”.

Think of it this way. If you invest £100 and get a 5% annual return, in a year you’ll have £105. If you get a 5% return in year two, you’ll then have £110.25. In year three, you’ll have £115.76.

So, while pausing or reducing your pension contributions now could save you some money, you’ll lose the potential returns from the money you’re no longer investing.

Add this to the potential tax relief and employer contributions you could lose, and it could add up to a significant sum by the time you come to retire.

HL provide a useful example.

If you pay £100 into a personal pension today, and you’re a basic-rate taxpayer, it’ll be worth £125 after tax relief is added.

Assuming it grows by 5% above inflation after charges, it could be worth about £540 in 30 years. If it’s a workplace pension where the employer has chosen to match the contribution amount, it could be worth £1,080.

Putting off your pension payments of £100 each month for a year could mean you miss out on between £6,340 and £12,680 in your pension after 30 years, assuming 5% growth after charges. That could mean you’d have to work a few more years to make up the difference.

Of course, you should remember this is using assumptions and isn’t guaranteed – tax rules can change, and benefits depend on personal circumstances. The contribution from your employer may also differ.

Get in touch

If you’re thinking about making changes to your pension contributions, or you’d like to find out if you’re on track for the retirement of your dreams, we can help.

Email us at enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

 

We aim to keep our clients up to date on interesting and relevant financial news.

You can sign-up to receive our monthly newsletter by email, even if you’re not yet a client. Sign-up using the form below.

Client testimonials

I have always found Black Swan to be caring and understanding of my quirky lifestyle. I always feel they try to get me the best returns while respecting my current needs.

Sally Muir

A client since 2011

We would be very happy to recommend the support and service we receive.

Valerie Locks

A client since 2010

I have always been completely useless regarding finance - thankfully our financial adviser is not! I've retired with far more than I ever expected and investments continue to grow safely. So - thank you!

Bernadette Jane Warner

A client since 2000

Very happy with the professional service I have received and feel a lot happier now with my finances put in order.

Martin Field

A client since 2011

Julie Cooper was recommended to me by a work colleague. She has been very helpful, professional and has explained everything well. I would definitely recommend her services to anyone else who are interested in a financial review.

Steven Rooke

A client since 2018

…Service has been first class.

Hugh Fells

A client since 2012

My face to face meetings with Rob Young and Jessica Lyons have always been very open and understandable. My questions have been answered clearly and I have left feeling that my financial matters are in good hands.

Sandra Jack

A client since 2000

[A] safe pair of hands in a complex financial world.

Gary Middlehurst

A client since 2003

A reliable company with good communication skills and good knowledge of the financial markets.

Alan Evetts

A client since 2014

Maureen Pembridge is a long-time trusted advisor to our family. The market might fluctuate but her attention to detail is consistent.

Linda Burnard

A client since 2000

I am pleased to recommend Julie as a trustworthy financial advisor. She explains financial jargon in plain language, and always listens carefully to my particular financial needs and has helped me make the best of my savings.

Carolann Samuels

A client since 2010

I have always been satisfied with the way that Black Swan has handled my account. And I have always found the staff very helpful whenever I need to call the office.

Robert Anthony Matthews

A client since 2012

An excellent personal service from a person I know and trust.

Michael Dalton

A client since 2010

I am getting a very good services from Black Swan, they have got my investments sorted out which was in a bit of a mess.

Roy Jakens

A client since 2012

A good, efficient team providing clear ideas to shape a winning strategy.

Adrian Michael Levenstein

A client since 2011

Black Swan is a company to be trusted, with friendly staff and professional advisors.

David Brian Jennings

A client since 2017

I have been with Black Swan for many years. I have never wished to change anything. They give a good straight forward service.

Martin Barrett Brooks

A client since 2010

Andy Peters has been invaluable in firstly combining several pension pots and then giving excellent investment advice. It has given us a great deal of comfort to know that our financial affairs are in such good hands.

James Guillum Scott

A client since 2014

I find my financial advisor easy to talk to and feel that she understands my lifestyle. She is always available for help when I need her and explains in words that I can understand.

Margaret Ena Glasgow

A client since 2000

Andy is a first rate Director, excellent communicator and leader.

Ross Perry

A client since

Black Swan Financial Planning and Andrew in particular, are very clever at working out how risk averse we are, and coming up with solutions that we feel comfortable with. We are happy in the knowledge that we can continue to enjoy a comfortable retirement. Andrew Peters is a very, very friendly person who is great to chat to and easy to deal with. He explains things very clearly in layman’s terms, and if we still don’t understand, he explains it until we do!

Alan & Jane Dyer

Clients since 2012

We have always found Rob [Young] to be very approachable and knowledgeable. We have every confidence in the advice given and feel comfortable with the decisions we’ve made. There are certain opportunities that we wouldn’t have known about if Rob hadn’t brought them to light, which makes the advice good value for money as far as we’re concerned.

Peter & Pauline O’Halloran

Clients since 2013

Rob [Young] is extremely knowledgeable. I knew nothing about the different types of trusts which will not only secure my income in retirement, but also leave a legacy for my children. I’m glad that I sought his advice when I did.

Sarah Wilson

A client since 2015

I am extremely happy with the service afforded to me by the company and my adviser Julie Cooper.

Geoff Coxell

A client since 2010

My wife and myself have been dealing with Black Swan for a number of years. We have met with different representatives from the company over the years and have found all very helpful in their own way. We met with James [Anderson] a few years ago and found him very helpful and knowledgeable. He keeps in contact with us on a regular basis. We find the Company information very helpful and we feel very secure with our finances.

Andrew Kirchen

A client since 2015

I have always found my adviser to be easy to contact, very professional in his approach, yet friendly and understanding. I have a sense of an experienced company behind him, really on the ball financially and with good standards.

B McBean

A client since 2011

Partner with the most reliable and experienced team of advisers

Enter your details & we'll be in touch to discuss your needs.
Alternatively, contact us directly and speak to a member of the team.





    Subscribe to our newsletter