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Suspending pension contributions

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Written by Sally Dempsey
Suspending pension contributions

Think carefully about how action taken now could affect your retirement.

As more people worry about money and are struggling financially, it’s likely that reducing or stopping their pension contributions may be an option to ensure they survive financially.

However, while it might be tempting to cut back on your pension contributions to have more money in the short term, it can have a significant impact on your finances and quality of life in the long term.

Before making such a decision to improve current cash flow, it’s important to understand the impact this could have on future finances.

Suspending contributions

Suspending pension contributions will reduce the total amount you’ve saved by retirement. How much it falls by will depend on how old you are, how much you usually pay in, and how long you suspend contributions for.

Recent figures suggest that a 25-year-old who suspends contributions for three years could see a 7% reduction in the total value of their pension at retirement, assuming they have an average salary and their employer also suspends contributions[1].

Lower pension value

How much extra money you’ll receive by suspending your contributions depends on how much you usually pay in.

Let’s say that you’re a basic rate taxpayer who usually makes pre-tax contributions of £140 a month. If you suspend your contributions, you’ll receive more salary but also pay more tax and National Insurance contributions, meaning you’ll receive approximately £4,000 extra over three years.

If, instead, you paid this into your pension and received tax relief, and your employer matched the contributions, a little over £10,000 would have been added to your pension.

This could grow significantly if left invested until retirement, so you would also lose out on the investment growth.

Damaging income effects

Reducing your pension contributions may seem like a good alternative. But this will also substantially reduce your pension value, particularly if you fail to increase your contributions again later.

Permanently reducing your contributions by 1% at age 25 could result in an 18% drop in retirement income[1].

If you feel that you have no choice but to suspend your pension contributions to make ends meet, you should aim to restart your contributions as soon as you’re able to. The longer you leave it, the more serious the impact this will have on your eventual retirement income.

Source data:
[1] https://moneyweek.com/personal-finance/pensions/602564/suspending-your-pension-contributions-remember-the-magic-of

Whatever your thoughts, to ensure you take account of the full range of available options, we would always recommend you consider obtaining professional financial advice.

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A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS PLAN HAS A PROTECTED PENSION AGE). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO 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 IN THE FUTURE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

This content is for your general information and use only, and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. All figures relate to the 2018/19 tax year, unless otherwise stated.

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