With the cost of living still high and a rising base rate pushing up mortgage repayment costs, there’s a chance you may be searching for ways to cut back on your monthly spending. 

Whether this squeeze on your household finances has become critical, or just made you realise you need to rethink your discretionary spending, you may be forced to make important decisions about your finances to cope with these rising costs, if you haven’t already. 

One method to cut your spending that you may have considered is to reduce, or completely halt, your pension contributions. If you’re feeling this way, then you’re not alone – a survey from Mortgage Solutions revealed that 23% of respondents said they would reduce pension contributions due to a strain on household cashflow.

While it’s understandable that you may be looking for ways to save money, the long-term implications of scaling down the amount of money you set aside for your future could be detrimental to your financial security. 

Continue reading to discover the impacts of reducing, or even halting, your pension contributions during a period of financial uncertainty, and some things you may want to consider first. 

People from all economic backgrounds have been considering cutting pension contributions

As mentioned, many people in the UK have considered reducing their pension contributions in an attempt to keep more money in pocket each month for compulsory spending. 

This seems like a common occurrence across the board regardless of your wealth, as even if you’re on a high income, you may not be completely immune to the effects of high living costs. 

In fact, research from Standard Life shows that 72% of households with incomes between £70,000 and £100,000 a year were considering cutting back on spending during this period of financial doubt which, again, could include pension contributions.

Similarly, for households with less than £20,000 in income, 86% say that they’ll need to reduce their spending and saving, while 83% of households with an income between £20,001 and £30,000 say the same.

Moreover, MoneyAge revealed that 14% of high net worth individuals – those with assets of £250,000 or more – have reduced their pension contributions within the past six months, and a further 14% plan to do so in the coming six months.

So, regardless of how much wealth you have, you may be considering doing the same to cope with the increased cost of living.

Reducing, or even halting, pension contributions could leave you with a shortfall in retirement

However, reducing your pension contributions, even for a relatively brief period of time, could significantly reduce the value of your retirement fund. 

To demonstrate this, the study from Standard Life considers someone who earns £25,000 a year and makes monthly contributions of 3% from the age of 22. 

In this example, the saver’s employer boosts contributions by 5%, while their pension savings benefit from an average investment growth of 6.25% and salary growth of 3%. 

Based on an average annual inflation rate of 2% a year, Standard Life calculates that the above pension would be worth £456,893 when the holder reaches the age of 68.

However, if the saver stopped contributing at 35 for just a year, the total value of their pension pot would drop to £444,129 – almost £13,000 less from just a single year of paused contributions.

If they halted contributions for two years, the value of their pot would fall by around £25,000, or roughly £38,000 for a three-year pause. 

It’s worth noting that the above example is illustrative, though it does highlight how pausing contributions to tackle any short-term challenges could be detrimental to your long-term financial security. 

It’s also important to remember that you’ll miss out on any tax relief boosts to your pot by halting or reducing pension contributions. 

When you make contributions, you typically receive tax relief from the government to further increase your pension savings. 

You can make tax-relievable pension contributions up to the Annual Allowance each tax year. As of the 2023/24 tax year, this allowance stands at £60,000 a year, or 100% of your earnings, depending on which is lower. 

This means that money you ordinarily would have paid in Income Tax is instead paid into your pension savings. For instance, if you’re a basic-rate taxpayer, a £100 contribution would only “cost” you £80.

Or, if you’re a higher- or additional-rate taxpayer and claim for relief on your self-assessment tax return form, a £100 contribution would only “cost” you £60 or £55, respectively. 

So, by pausing or reducing your pension contributions, you’re essentially passing up on tax relief that could significantly boost the overall value of your pension fund. 

Above all, it’s worth considering the dangers of a pension shortfall caused by a lack of savings. If you’ve planned your dream lifestyle after you stop working, and don’t save enough, you may need to compromise on your lifestyle. 

3 things to consider before you reduce or halt contributions

Inflated costs in recent years may mean that you need to make some tough decisions. Even though halting or pausing pension contributions may seem like a straightforward way to retain some disposable income in the short term, there are some things worth considering before you do so – read on to discover three of these considerations. 

1. Rethink your budget

A well-thought-out budget should ideally be the cornerstone of your financial plan, so it may be prudent to sit down and rethink your household expenditure. 

You may want to consider the rising cost of goods and services and heightened mortgage repayments. Then, you may be able to identify areas where you could cut costs without damaging your long-term financial security. 

For instance, you may discover you have direct debits for TV streaming services or a gym membership that you no longer use. Or, you could find cheaper alternatives for things such as car and home insurance by shopping around. 

2. Speak to your employer

If you’re considering stopping your workplace pension contributions, it may be worth speaking to your employer about reducing them rather than halting them altogether. 

In fact, your employer may even have other schemes and ideas available that could help you financially, all while protecting your pension contributions.

For example, your employer may allow you to reduce your own contributions while they continue with theirs at the current level so you don’t receive any less from them. Then, when you can afford it, you can return to your previous level of contributions.

3. Seek professional advice

Before making any important decisions about your pension contributions, speaking to a financial planner may be beneficial. 

We’ll help you work out exactly what income you’d need to achieve your dream lifestyle in retirement, and, consequently, what you need to contribute to your pension to reach these goals. 

We’ll take your personal milestones into account and help you make informed decisions to target your desired lifestyle so you can rest assured that you won’t end up with a shortfall when you stop working. 

Get in touch

If you’re searching for ways to cut costs, we can help you figure out how to do so without damaging your long-term financial prospects.

Please email info@holbornfinancial.com or call 020 8946 8186 to get in touch with us today.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, 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 in the future.