The cost of living crisis is causing many of us to rethink our finances. To cut back on their outgoings, some people have stopped paying into their pension or are leaving workplace pension schemes altogether. But choosing to pause your pension contributions could spell disaster for your long-term savings.
All employers are legally required to automatically enrol their employees into a pension scheme. The employer and the employee (i.e., you) pay into the pension scheme together – and you get a government bonus. At a minimum, this amounts to 8% of your total salary.
For a more in-depth look at pensions and how they work, take a look at our guide.
If you opt-out of a workplace pension, both you and your employer will stop making contributions to your pension pot. You won’t lose any money that’s already been put into your pension, but you won’t be able to draw this money out. What’s more, you could miss out on other benefits, such as life insurance cover, which some workplace pension schemes offer.
If you choose to opt-out of a workplace pension within one month of being enrolled, you’ll get back any money that you’ve paid into it. However, you won’t get back any contributions made by your employer. If you opt-out of a workplace pension after you’ve been enrolled for more than a month, your funds will be held until you’re able to claim your pension (usually, at the age of 55).
If you have a personal pension with CIRCA5000, you have the flexibility to pause or reduce contributions if you’d like. However, you should always weigh up the long-term impact of doing so. Putting pension contributions on hold is an extreme measure and not something to be taken lightly. If you stop paying into a pension, it could cause some serious issues for you later down the line.
Let’s look at some of the main reasons why you shouldn’t take a pension holiday.
If you’re being paid £40,000 a year before you’re taxed, taking home an extra £1,600 (4%) from your own annual contribution may sound tempting. But if you stop paying into a pension, you’ll actually end up losing money: you’ll miss out on your employer’s contribution and the government tax relief, too
Using a basic calculation*, those combined contributions over a year would have been £3,200 (8%). If that same amount were left in your pension for 30 years with steady growth, it would amount to £32,201.
The information provided above does not constitute financial advice. You should fully understand the products you intend to invest in before making an investment decision. As with all investing your capital is at risk.