In the midst of the cost-of-living crisis, the pressure on household budgets is considerable. Many people are frantically looking for ways to reduce costs and maximise their income to ensure they can keep a roof over their heads, food on their table and the heating on this winter.
The canny amongst us will have a household budget that splits out essential spending on things such as a mortgage or rent, utilities, and food, from non-essential expenditure on those things we can do without. However, there are only so many ways we can control our costs and limit our expenditure, and that may be why a Canada Life survey has found that around 5% of UK adults have stopped their monthly company pension contributions, 6% are considering pausing contributions, and 9% may do so in the future.
On the face of it, people may see this as a sensible solution to what is, hopefully, a short-term cost of living issue. After all, isn’t putting money into a pension each month a little extravagant when cash is short – especially if retirement is many years, if not decades, away?
The answer to this will depend on an individual’s circumstances, but employees need to be aware of the implications of reducing or stopping pension contributions, even for a short period, as it can have a significant impact on their pension pot come the day they retire.
In fact, an example by Standard Life of an “average person” calculated that someone who began work at the age of 22 with a salary of £25,000 per year and paid the standard monthly auto-enrolment contributions (3% employee, 5% employer) would reduce their retirement fund by almost £13,000 if, at the age of 35, they stopped pension contributions for just one year!
Alongside this, employees need to understand that stopping or pausing pension payments won’t translate into an uplift in their disposable income by the amount of their monthly pension contribution. This is because pension payments benefit from tax relief, so every £1 that goes into a pension includes a proportion that the government essentially contributes. It is important also to remember that any additional money received in their pay packet after they stop their pension payments will be subject to tax and national insurance deductions. As a result, the amount of extra money they will have each month by stopping pension contributions is likely to be far less than they first imagined.
Deciding whether to fund their future versus supporting their ‘now’ is a hugely complex and difficult decision for anyone to have to make. Therefore, anyone considering pausing or stopping their pension contributions must understand how the short-term benefit could have long-term implications.
Now is the time for employers to equip their people with the knowledge, tools and skills they need to make informed pension decisions and help them have the sort of retirement they ultimately want.
If you would like to find out how Better With Money’s courses provide financial education in the workplace and help people make better money decisions, please get in touch.