Don’t make this mistake with your pension

Why you shouldn’t pause your pension contributions

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.

A quick recap on how workplace pensions work

All employers must legally enrol their employees into a pension scheme automatically. 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.

How workplace contributions work
How workplace contributions work

For a more in-depth look at pensions and how they work, take a look at our guide.

What happens if I stop paying into my pension?

If you opt out of a workplace pension, you and your employer will stop contributing to your pension pot. You won’t lose any money already put into your pension, but you won’t be able to access that money until you are 55. When you stop paying into your pension, you could miss out on other benefits, such as life insurance coverage, which some workplace pension schemes offer.

If you opt out of a workplace pension within one month of being enrolled, you’ll get back any money you’ve paid into it. However, you won’t get any contributions made by your employer. If you opt out of a workplace pension after being enrolled for more than a month, your funds will be held until you can 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 further down the line.

The long-term impact of pausing your pension

Let’s look at some of the main reasons why you shouldn’t take a pension holiday.

1: You’ll lose money

If you’re being paid £40,000 a year before you’re taxed, taking home an extra £1,600 (4%) from your 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.

So that extra £1,600 that you’ve got – which should have been going into your pension pot – could take a huge chunk out of your retirement savings. And this could impact the type of life you enjoy in retirement.

2: You may need to work for longer

If you stop paying into your pension pot now, you may find that you need to work for longer to top up your funds when you’re nearing retirement. The truth is that many people already invest too little into their pensions, so any further cuts to your savings could have a detrimental impact in the future. And, even if you plan on working longer, things may change. None of us can know for certain what the future holds, but having a healthy pension will give you the flexibility to decide how you want to live your life in retirement.

3: The state pension may not cover you

In the UK, you can claim a state pension once you reach the state pension age (this is currently 66 years old but is subject to change). However, you’ll likely find that the state pension isn’t enough for you to live on and will only cover the basics. If you want to fund your lifestyle properly in retirement, you’ll need another source of income – which you can draw from your pension savings. The takeaway? Decreasing or stopping your pension contributions altogether is a short-term solution, but it could have serious consequences in the future. If you need financial support, speak to an advisor. If you have questions about your CIRCA5000 pension, visit our support page. 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.

Important information - Investments can go down in value as well as up, so you can get back less than you invest. The information on this page isn't investment advice. If you're not sure if an investment is right for you, please seek advice. Tax rules can change and depend on individual circumstances.