Pension Pausing: A Short-Term Solution with Long-Term Consequences?

The cost of living continues to pinch the pockets of the UK public, causing many to reconsider their financial commitments. One significant trend emerging is the decision by many to cut or even stop their pension contributions altogether. But what does this mean for their future, and is it a viable solution?

The Rising Trend: Cutting Pension Contributions

Recent figures are alarming. According to LCP’s 2023 Financial Wellbeing study, over half (51%) of employers said their employees have requested to reduce pension contributions, and nearly half (47%) have seen staff ask to stop them entirely.

Jennifer Page, a 40-year-old primary school teacher in Birmingham, is one such individual. After a career switch from sales to teaching, her salary was cut in half. Despite recognising the importance of pensions, Jennifer opted out of her pension scheme twice in the past three years. The primary reason? Financial pressure.

“For purely financial reasons,” she laments, “I just couldn’t stretch that far.” Despite a slight salary increase, personal circumstances led her to prioritize immediate expenses like Christmas and birthday presents over future financial security.

The Legal Framework and Benefits of Pensions

In the UK, if you’re employed and earn £10,000 or more annually, your employer is required by law to automatically enrol you into a pension scheme. The employer has to contribute at least 3% to it, with the total minimum contribution being 8%. Additionally, if you’re paying income tax, you’ll get tax relief on the money you contribute.

This seems like an excellent deal, especially given research indicating that an annual income of £23,300 is required for a “moderate” retirement lifestyle. Yet, Jennifer isn’t alone in her decision. A study by Hargreaves Lansdown discovered that more than 1 in 5 people have reduced or halted pension contributions due to the cost of living crisis.

Chris Brooker, a 47-year-old self-employed smart technology business owner, has also opted against pension contributions. His reasoning lies in flexibility: while pensions offer certain tax advantages, they also tie up money for long periods. For Chris, having access to his money, especially in uncertain times, is a priority.

Considering the Long-Term Impact

So, what’s the real cost of pausing your pension?

A snapshot from Royal London highlights the gravity of the situation. In the past two years, a staggering third of all workers considered reducing or stopping their pension contributions. For younger workers aged 18-34, that number jumps to almost half (49%).

Choosing not to pay into a pension might provide short-term financial relief, but the long-term implications can be severe. For instance, a worker earning £35,000 who decides to contribute 5% less into their pension might see an annual boost of £1,404 in their take-home pay. However, they would potentially miss out on an annual £4,092 in pension savings when considering employer contributions and tax relief.

Becky O’Connor from PensionBee cautions against such decisions, stating that one might end up without enough funds to cover basic living costs during retirement. “Your future self will thank you for it,” she emphasises.

To put things into perspective, the £4,092 someone might save annually by not opting into their workplace pension could, over 20 years, contribute an additional £10,575 to their pension pot due to investment growth.

In Conclusion: Weighing the Choices

Making financial decisions, especially those affecting our future, can be daunting. While pausing pension contributions might offer immediate financial breathing space, it’s essential to weigh the long-term implications. As the cost of living continues to challenge us, making informed, future-focused decisions will be crucial.