5 reasons why you should not stop paying into your pension plan
Retirement may seem a long way off and not feel like a priority especially when you’re facing soaring food prices and heating bills – however, your future self may thank you for saving into a pension plan now.
With ballooning costs of living, most of us are looking for ways to cut costs or find ourselves dipping into savings. It can be hard to re-start a savings or pension habit once you have lost it. Circumstances differ from person to person, but it’s worth considering that reducing your pension payments may not be a wise thing to do – keep the habit going if you can.
The pros of solid, sustained pension planning outweigh most short-term sacrifices. Here are 5 main reasons why not to cut back!
1. The State Pension may not be enough to cover your outgoings
At first glance you may think the cost of living during retirement will decrease thanks to state supported concessions for the elderly – from travel to heating. However, aside from these benefits perhaps not providing you with as much money as you may think, you may have more ‘free’ time than ever before – with more time could come more spending.
So before reducing or stopping your pension payments altogether, check out whether the State Pension would cater for the retirement date or lifestyle you hope for. Firstly, it won’t be available until your late 60s. Secondly, the new flat-rate State Pension pays less than £200 per week or £10,000 per year, which is far less than a job on National Minimum Wage.
2. You would miss out on help from the Government
You receive tax benefits from the Government. As an example, a basic rate taxpayer, paying a monthly payment of £100 would only cost £80 in real terms as the Government pay £20 in tax relief.
This means you could be missing out on an extra £240 a year; higher rate and additional taxpayers may benefit even more.
The tax benefits on pension payments may be delivered to you in different ways depending on what type of pension plan you have and how much income tax you pay. But the over-arching point is the same, if you stop your pension payments, you turn down an extra boost from the government.
3. You would lose payments from your employer
If, like millions of people across the UK, you have been automatically enrolled in a workplace pension scheme, your employer also contributes to your pension pot. They must put in the equivalent of at least 3% of your earnings, alongside your own payments of 5% (or more).
For example, if you earn £24,000 a year and pay £1,200 a year (5% of your earnings) into your pension, your employer will top that up by at least £720 a year (3% of your earnings).
So, a serious downside to stopping your own pension payments (or reducing them to less than 5% of earnings), is that your employer can stop making their own payments.
In this example, taking a pension ‘holiday’ for a year would mean missing out on a top-up of £720 from your employer. This cannot be reclaimed later either!
It may also be worth considering how much more you would receive in your take-home pay if you were to stop contributing to your pension. It’s probably not as much as you might think.
4. The hit to your future plans could be bigger than you think
It’s worthwhile thinking about the benefits of compounding when deciding whether to stop paying into a pension. In simple terms, compounding means you can potentially achieve growth not just on the original sum but on the growth as well. The benefits of this can be especially powerful if you’re still a while away from retirement age.
5. Stopping now may mean working for longer!
If you’re struggling to pay bills or balance your budget, the risk of a reduced pension pot may seem very remote – “there’s plenty of time to catch up when things ease”. Life can be complicated at the best of times and unexpected events make manifesting additional disposable income to close that contribution gap far from easy.
It is thought that many people are already putting aside too little to provide the retirement lifestyle they want. Cutting your payments now could impact your future lifestyle further, or mean you have to work much longer to build up your pension pot.
For any other enquiries about your retirement, don’t hesitate to contact us on 01903 534587.
*A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. the tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.
The above taxation information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
The information contained within this article is for guidance only and does not constitute advice, which should be sought before taking any action or inaction.