When money is tight, or an unexpected bill turns up, paying into your pension can seem a bit of a luxury and is often the first thing to be cut back. But before you go – here are a few things to think about.
Why should I pay into a pension?
If you’re employed, you’re automatically enrolled into a workplace pension scheme. Paying into a pension now, while you’re working, means you can have an income when you’re not. It’s as simple as that. The sooner you start, the longer your savings have time to grow, and the more you’ll build up.
Your employer must also pay into your scheme, so leaving is like turning down part of your pay.
There is a minimum amount that employers must pay by law, but many pay more than that. Find out exactly what your employer is paying into your pension scheme before you give that up.
You may also get tax relief on your pension contributions. This means you either get more in your take home pay by paying less tax or more money goes straight into your pension scheme. It depends on the type of scheme you have – you can find out more on our Tax relief and your workplace pension scheme page.
If you pay basic-rate tax (20%) you will get an extra £20 for every £80 you pay into a pension.
If I stop paying for a couple of years it won’t make much difference will it?
You would be surprised at how much you could lose out on in terms of contributions from your employer and tax relief and investment growth. Also, If you leave your scheme you might lose valuable benefits paid to you if you were ill or paid to your dependents if you died.
Jane earns £35,000 a year and she and her employer both pay 5% of her salary into her pension scheme, a total of £3,500 a year.
If Jane took two year-long career breaks from her job this could mean as much as £25,000less in her pension pot when she wants to stop work permanently.
A five year break and then returning to work part-time could reduce the pot by£100,000.
I don’t want to stop working – so I don’t need a pension
You might think that now, but no-one knows what the future holds, and you might change your mind. Even if you don’t want to stop working, having a pot of savings you can draw on when you are older gives you more flexibility in how you live your life and means you can keep doing the things you enjoy doing now.
Also, there are lots of ways to access your pension savings once you are 55. But no savings means less choice later.
I’ll get a pension from the government – why should I have to pay twice?
The full State Pension for people reaching State Pension age during 2019/20 is £168.60 per week. Could you live on that?
State Pension age is increasing, and many people won’t get access to their State Pension until they are 67 or 68 or even older. You can access the money in your pensions savings from age 55.
My property will be my pension
Even if you are lucky enough to be able to buy your home and pay off your mortgage before you want to stop working, you are still going to need somewhere to live. Downsizing can work for some people and can release some cash – but enough to provide you with an income for the rest of your life? Very unlikely.
What else can I do?
If you’re worried about money, talk to your employer to see if you can lower the amount you contribute. Employers have to pay at least 3% of your qualifying earnings on your behalf, but many pay in more – which means you might be able to pay in less, rather than stop altogether. But it’s a good idea to make a commitment to increase it again later.
Get some help before you decide
Talk to your employer, your work colleagues or friends and family – whoever you feel most comfortable talking to - and get their opinion about what you should do. Or talk to one of our impartial pension experts who can explain in more detail the consequences of leaving your scheme on 0800 138 7777 option 2.
You can also contact us through Webchat or through WhatsApp - see contacts at the end of this guide.
Bigger problems? Get some help
If your money worries are bigger than just reducing your pension contributions, you can call our money guidance helpline confidentially on 0800 138 7777 as there may be other solutions.
Your savings will always be yours
If you do decide that leaving is the right option, then don’t worry. Your savings will be safe and will always belong to you – even the amounts paid in by your employer. If you change jobs, you can either take your pension savings with you to your new employer’s scheme or leave them where they are (but don’t forget about them!). You can come back to the scheme at any time by simply telling your employer you want to re-join, and you can increase the amount you pay in order to catch up, whenever you want.
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