A fully flexible way to invest
4 minute read
We explore the impact of stopping pension contributions during the cost of living crisis.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.
Please bear in mind that tax and pensions laws can change and that their effects on you will depend on your individual circumstances. We don’t offer personal advice.
Cost cutting will be high on the agenda for many families struggling with the cost of living crisis, recently exacerbated by the higher energy price cap.
Energy bills, grocery shopping, fuel prices – you name it, it’s going skywards.
By going through your monthly outgoings it’s possible to identify ways you can reduce them and offset the rising costs.
However, experts are warnings of the dangers of stopping pension contributions as part of such a money-saving exercise.
While most workers are now enrolled in a workplace pension under the government’s auto-enrolment scheme paying at least 5% of their salary into their pension, it’s not compulsory. You can opt out and instead take home more of your monthly salary. Equally you might be tempted to reduce or even stop payments to a private pension. But the long-term impact could be detrimental to your retirement plans in the long term.
Here are three reasons why:
As well as stopping your own payments into your pension pot – whether it’s a work scheme or private pension such as a self-invested personal pension (SIPP) - you could lose out on the valuable boost of pension tax relief from the government. As a reminder, saving in a pension is an extremely tax-efficient way of investing. Most people get 20% income tax relief with higher or additional rate taxpayers benefitting from a higher level of relief that can be claimed via a self-assessment tax return.
If you pause your workplace pension, you’ll also essentially be turning down free money in the form of your matched employer contributions (for those that are employed rather than self-employed).
Your employer must contribute a minimum amount, in most cases this is 3%. But many employers offer much more generous terms.
Even though you might think about making up the payments at a later date, you can’t get back lost time for compounding.
In simple terms, when you invest your money it will hopefully increase in value and you’ll earn a positive return most years. Assuming it does, after the first year, both the original capital and the return will benefit from any further returns in the second year. In the third year your investment is further enhanced by any returns achieved, then and so on. This snowball effect is known as compounding.
It's the earliest contributions that have the opportunity to benefit from compound growth over time – so by putting off saving today you’ll likely need to work harder to make up for lost time later on.
The dent in your pension savings caused by stopping payments means you might have to work longer than planned to reach your goal - or settle for a perhaps less comfortable lifestyle than you would have liked.
Instead of cutting back on pension contributions, you could instead spend some time to ensure your money is working as hard as possible to reach your retirement goals.
You can review schemes held by previous employers and make sure they offer value for money. The self-invested personal pension (SIPP) is one way of boosting your retirement savings if some of your money is in schemes with high charges or inferior investment options.
SIPPs offer access to a large range of investment funds. You can choose from more than 2,000 funds plus Exchange Traded Funds (ETFs), investment trusts and shares via a Smart Investor SIPP.
You have complete freedom to choose how and where your SIPP money is invested within the options available.
Your investment choices can be changed at any time, so that your SIPP always reflects your own risk horizon and goals. This is useful because throughout life your attitude to risk can change. For example, in the run up to retirement you’re likely to want to consider shifting a large portion of your pot into less risky investments.
SIPPs allow you to transfer-in from other schemes – private and workplace – so you can have all your retirement savings in one place. However, it’s important to check that you’re not giving up any valuable guarantees or benefits attached to pension schemes by moving the money. It’s also crucial to consider any difference in annual charges before taking any action.
The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.
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