Find out why it's crucial to keep your pension contributions up even when money is tight
Find out why it’s crucial to keep your pension contributions up even when money is tight
According to HM Revenue & Customs, personal pension contributions have dropped by 5% during the recession. That might not sound too drastic, but you’ll be surprised by the impact this could have on the value of your final pension pot.
The figures
Let’s imagine you’re 35 and you’ve been paying £200 a month into your pension plan. With basic rate tax relief, your total contribution is £250. If you continue to make £200 contributions, when you retire at 65, you could have built up a pot worth £111,000.
Cutting your contributions by 5%
But what if you decide to tighten your belt a little and cut your pension payments by 5% to £190 a month? With 20% tax relief added, your total contribution this time is £238 – so just £12 less every month.
So, how might this seemingly small reduction affect your pension? After 30 years, your fund could be worth £105,000. That means you have lost a chunk worth £6,000. Sure you’ll have saved £3,600 by paying £10 less out of your own pocket each month, but you’re still £2,400 down.
Knocking £6,000 off your pension value could reduce your income by £200 every year for the rest of your life. If you survive for 20 years in retirement, that could mean losing £4,000!
So, you can see scaling back your pension contributions - even by a relatively small amount - could turn out to be a false economy.
What should you do instead?
Unless there’s no way you can afford your pension, you really should try to keep your contributions up. In fact, you should ideally increase the amount you save each year to inflation-proof your payments.
But if you’re concerned about locking your money away until you retire, you could try switching from a pension to an ISA. That way you can continue to save tax efficiently for your retirement, but crucially you’ll be able to dip into it in an emergency - such as losing your job. Again, however, this could mean a significantly smaller income later in life.
The simple fact is: a small cut in your pension contributions today is likely to result in a big cut in your income when you retire. So do the maths before you decide to do it!