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Why you shouldn’t cut your pension contributions to save money

With the news of a recession, lots of people are looking at ways to cut back and save cash. We look at why cutting your pension contributions shouldn’t be first (or even last) on your list.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

We’re seeing first-hand the value of having cash set aside for when the worst happens. Our recent survey found that, of the people who are spending less, over half say they’re worried about the future and don’t want to spend too much.

It’s hardly surprising.

Lots of people are still reeling after seeing their monthly income drop during lockdown. Even those who were financially stable before might now have to cut back to make ends meet. And now we’re officially in a recession, people might be starting to rethink how much they’re spending on non-essential things.

Those fortunate enough to have saved money as a result of the pandemic aren’t necessarily planning on going on a spending spree either. Our survey in June found that almost three quarters anticipate changing their spending habits long-term in light of coronavirus. And of those who’ve saved money, just under half said they have or will put it towards a rainy day fund.

This article and our online tools aren't personal advice. If you're at all unsure please take advice. Tax and pension rules can change and any benefits will depend on your circumstances.

Protecting yourself – and your future self

Rethinking your spending and saving habits is no bad thing. If the Covid crisis has taught us anything about our finances, it would be that it’s a good idea to have a cash fund you can dip into in case of emergencies (once you’ve paid off any short-term debt).

As a rule of thumb, you should keep around 3-6 months’ worth of expenses in easy to access cash for everyday spending and emergencies. This might sound like a lot, but if you can’t work, you’ll find that your rainy day fund can disappear quicker than you might think.

If you don’t have enough cash put away, we’d recommend sorting that as a priority.

We have a budget calculator to help you look at how much you’re spending. No doubt your spending habits would’ve changed significantly in the last few months, so now’s a good time to see where you can cut back.

Why it doesn’t always pay to cut your pension contributions

If you want to cut costs or start putting cash away for the future, it’s tempting to reduce your pension contributions. It’s understandable when it’s such a large expense coming out of your pay each month and you aren’t able to access the money in your pension until at least age 55 (57 from 2028). But actually, your pension payments are one of the areas you should try and leave untouched unless you really need to.

Granted you need to have enough money to live, but you also need to look after your future-self. Your pension is an important part of your future, so look after yourself by trying to cut down on other non-essential spending first. As lockdown has shown us, meals out and pub trips are great for our wellbeing, but you maybe don’t need to go out as much as you did before.

Use our budget calculator to see how much you could save

What £100 today could be worth when you retire?

The money you put in your pension could be worth more when you come to retire than if you spent it now. That’s because it’s got time to grow, plus tax-relief and even employer contributions to help it along.

If you pay £100 into a personal pension today, it’ll be worth £125 after tax relief is added. Assuming it grows by 5% above inflation after charges, it could be worth about £540 in 30 years. If it’s a workplace pension where the employer has chosen to match the contribution amount, it could be worth £1,080. But remember this is using assumptions and isn’t guaranteed – tax rules can change and benefits depend on personal circumstances. The contribution from your employer may also differ.

So when you think of cutting your monthly pension contributions to continue other non-essential spending, think again. Putting off your pension payments of £100 each month for a year could mean you miss out on between £6,340 and £12,680 in your pension after 30 years, assuming 5% growth after charges. Or mean you have to work a few more years to make up the difference. Remember though all investments go down as well as up in value, so you could get back less than you invest.

You can see this for yourself using our pension calculator. Put different contribution levels in and see how paying in more can really add up over time – and the difference reducing your contributions makes.

Try our pension calculator

Keep in mind that these figures don’t take into account the effect of inflation which can reduce the spending power of your money. You can use our inflation calculator to get an idea.

How to look after yourself in retirement

Keeping up your pension contributions could help you feel more confident about the future. And mean you’re not struggling to make ends meet in retirement.

If you’re employed, the first thing to look at is your workplace pension contributions. When you pay into your pension, so does your employer and the government. So it rarely makes sense to reduce or cut your workplace contributions to make savings elsewhere. If you’ve reduced them in the last few months, maybe go back to your budget and see if you could save money on other non-essential items instead.

You could even talk to your employer and see if they’ll pay in more if you do too. Again, use the pension calculator to see how these extra boosts can all add up.

If you’re self-employed or have a private pension, it’s worth keeping up or starting regular contributions into a pension. Our Self-Invested Personal Pension (SIPP) is flexible and lets you start, stop or change your monthly direct debit when you need to. You can lower it to as little as £25 a month, and then increase it again once you’ve got more cash.

The SIPP also lets you make one-off payments into your pension via debit card. It’s quick and easy to do it online or via the HL app. So if you’re looking for work or your income varies each month, you can top up your pension as and when you have the cash.

Find out more about the SIPP

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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