Don't Make This Mistake With Your Pension

Don't Make This Mistake With Your Pension

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Don't Make This Mistake With Your Pension

Lucy O'Boyle 

Pensions • 4 min read

The cost of living crisis is causing many of us to rethink our finances. To cut back on costs, some people have stopped paying into their workplace pension or are leaving workplace pension schemes altogether (Guardian). But, halting payments into a workplace pension could be a disaster for your long-term savings. 

Putting pension contributions on hold is an extreme measure to be taken in a financial emergency.

Savings are no longer stretching as far as they once did, and we're all getting a nasty surprise when we look at our receipts after the weekly food shop as prices continue to rise. 

Reducing your monthly pension contributions may seem a simple way to do this at first. After all, you won’t need the money in your pension for a while, right? 

But, reducing your contributions or leaving your workplace pension scheme could cause future-you major problems down the line. And here’s why. 

A quick re-cap on how workplace pensions work (we’ll keep it short, promise).

All employers are legally required to automatically enrol their employees into a pension scheme.

The employer and the employee (you) pay into the pension scheme together, and you get a government bonus. At a minimum, this amounts to 8% of the employee's (your) total salary. 

Example of a workplace pension contribution breakdown

Don't starve your pension.

If you’re being paid £40,000 a year before you’re taxed, taking home that extra £1,600 (4%) from your own yearly contribution may be tempting. But before you drop everything to reduce your pension contributions wait. Your employer's contribution and the government relief will grind to a halt 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. 

So using that £1,600 now that should have been going into your pension could take a massive chunk out of your retirement savings and impact the type of life you can enjoy when you retire.

The takeaway? Decreasing your contributions is a short-term quick fix that could cause long-term pain in your future. Reducing pension contributions should be a last resort. 

When you invest, your capital is at risk.

If you are looking for advice on saving, Money Saving Expert is a helpful resource that our team love.

*Calculation based on 8% returns from an initial contribution of £3,200 annually being reinvested. 

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