I currently contribute 5% to my employer’s pension, but with the rising cost of living, the money is so scarce. Should I put my contributions on hold and use the money to cover my bills instead?
Do you have a question about the cost of living crisis that you would like answered? Contact us and we’ll answer them every Friday: email@example.com.
Our answer :
Inflation is rapidly climbing into double digits as wages fail to keep pace. It is therefore understandable that some workers consider putting their retirement savings on hold to focus on the end of the month.
But if withdrawing from your employer’s pension would increase your take-home pay (a little), it could cost you more in the long run.
Do I have a professional pension?
If you are 22 or over and earn more than £10,000 you are automatically registered for an occupational pension by your employer. You can enter if you earn below that, but that’s up to you.
This money then becomes income for when you stop working. The earlier you start, the more time your savings will have to grow and the more you will accumulate. So suspending your contributions can throw a bit of a headache.
In the context of self-affiliation, your pension contributions must be at least 8% of your income. It’s 5% from you and 3% from your employer.
If your employer pays more than 3%, you may pay less. For example, if they contribute 4%, you only have to contribute 4%.
However, you actually get more than that because your contributions qualify for tax relief.
If you are a basic rate taxpayer – earning no more than £50,270 a year and at the 20% rate – investing £100 in your pension would only cost you £80.
If you are a higher rate taxpayer in the 40% bracket it would only cost you £60, but you may have to claim the difference yourself from the taxman.
Here is an example :
Sam earns £2,000 a month before tax. He must contribute 5% of this amount, or £100 per month.
- His employer pays 3%, or £60
- The government is paying part of Sam’s contribution by giving him 20% tax relief on that £100, so £20
- Sam then has to pay £80
Total cost for Sam: £80/month
Total pension contribution: £160/month
By retiring, he would get an extra £80 to spend that month, instead of adding £160 to his retirement pot.
In other words, withdrawing is like refusing part of your salary.
What benefits will I lose if I suspend my employer pension?
Not bad. The most obvious benefits you will lose are:
1. Tax relief. If you decide to take the money you were putting into your pension, you will now have to pay tax on it.
2. Contributions from your employer. It’s basically free money that you won’t get if you stop contributing to your company’s pension plan.
You could also miss the opportunity to pay less tax if you stop contributing to your occupational pension scheme.
Some workers choose to increase their pension contributions to save, for example, on the tax burden of high-income child benefits.
If you are applying for child benefit and you or your partner earn more than £50,000 a year, you must pay this fee.
But pension contributions can “adjust” your net income so that you fall below the threshold, meaning you don’t have to pay it.
When deciding to retire, it is important to consider your age, personal circumstances, how much you already have in your pension and any dependents who may also be affected.
Learn more about how much you should contribute to your pension.
Will opting out for a year make a big difference?
You’d be surprised how much you could lose by going for just one year.
The money you contribute to your retirement pot is invested by the retirement provider in assets such as stocks. Any returns made on an investment are then invested, so the returns add to the returns from that point on. This is called “compounding”.
Say you have £100 to pay into your pension on 1 January. Over the year it increases by 5%, so that on December 31st your kitty is worth £105.
If the pension pot increases by 5% next year, you would have £110.25. Not only did you make money on your original £100 in year two, you also made money on the growth in year one.
Take Sam’s example above. If Sam stopped contributing to his pension for a year, he would save £960. Accounting firm Mercer & Hole calculates that when you project this over 20 years and assuming a 5% return on investment each year, Sam will have missed out on having an extra £4,851 in his pension.
There are never any guarantees as your investments can go down as well as up. However, since your retirement capital is invested over a long period of time, you are likely to smooth out the ups and downs along the way.
There is also no income tax or capital gains tax to pay each year on any growth in the retirement pot.
I plan to work until very late in life, so do I really need an employer pension?
It depends. No one knows what the future holds for us. Some plans also provide financial assistance for you if you fall ill before retirement, or for your dependents if you die.
The opt-out means that none of these support measures would be in place.
Won’t the state pension cover me?
The new state full board is £185.15 per week. If you want to live longer than that, you’ll need other savings in place.
More importantly, the legal retirement age is increasing and some current workers will not be able to access this money until they are 68 or over, while you can collect your occupational pension from 55.
You may have assets, such as property, that could cover you instead – but unless you have a house or apartment to rent that you could rent out, that may not be enough.
Even if you’ve paid off your mortgage, you still need a place to live, and if you’re downsizing you may still want a steady income to cover fluctuating living expenses.
What can I do instead of withdrawing?
Talk to your employer to see if you can reduce the amount of your contributions.
Businesses must pay at least 3% of your qualifying revenue on your behalf – out of that total minimum of 8% of your revenue – but many pay more. This means you may be able to contribute less, rather than quitting altogether.
You can also suspend your pension for 12 months and then increase your contributions thereafter.
Talk to your employer, pension fund and family members. These different groups can help you weigh your options, both in terms of increasing your income and the financial risks of opting out.
Read more: Should I pay £5,000 for pension advice?
How do I opt out of my company pension plan?
You will need to speak to your pension fund. He will then give you an unsubscribe form that you must complete. Some of these forms are available online.
If you unenroll from the program within one month of your automatic enrollment, you will be treated as if you had never joined the program. The sums you have paid will be reimbursed to you in full, less your employer’s contributions.
If you decide to withdraw after more than a month, any contributions you may have will likely be retained in the plan.
You usually cannot start withdrawing money from your retirement fund until you are 55 or older. This increases to 57 in 2028.
Will I be registered again?
The opt-out lasts up to three years. After this point, you will automatically be re-registered.
If you change your mind, you can ask your employer to re-enroll you earlier. Or you can choose to retire for another three years.
Although you can apply to rejoin the plan at any time, your employer only has to process applications once every 12 months; it’s usually around the start of the tax year in April.
If you opt out due to the cost of living crisis, be sure to speak to your employer about re-enrolling as soon as possible. Your pension fund should advise you on this free of charge.