Five reasons why you shouldn’t stop paying into your pension plan

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As bills and the cost of living keep on rising, most of us expect to cut back on spending or saving. Everyone’s circumstances are different, but here’s why stopping or reducing your pension payments could be a mistake for some in the long run.

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Energy bills, food, fuel, meals out, hotels – they all cost more than a year ago and rising inflation may push them up further. It’s not surprising, then, that over three-quarters (77%) of our customers expect to rein in their spending and saving to manage these cost-of-living challenges. 

The good news is that very few of the people we surveyed plan to cut back on their pension payments. It’s good news because there are sound reasons not to stop paying into a workplace or personal pension plan. Although a freeze on your pension payments may look like a useful way to boost your pay packet or reduce your outgoings, there could be consequences in the long run.

1. You’d lose payments from your employer

If, like millions of people across the UK, you’ve been automatically enrolled in a workplace pension scheme, your employer also contributes to your pension pot. They must put in the equivalent of at least 3% of your earnings, alongside your own payments of 5% (or more). 

For example, if you earn £24,000 a year and pay £1,200 a year (5% of your earnings) into your pension, your employer would top that up to at least £720 a year (3% of your earnings).

So, a serious downside to stopping your own pension payments (or reducing them to less than 5% of earnings) is that your employer can then stop making their own payments. In the example above, taking a pension ‘holiday’ for a year would mean missing out on a top-up of £720 from your employer. And you can’t ask for these ‘lost’ payments back if you re-join later: they’re lost to you forever.

It's important to check how much more you'd actually receive in your take-home pay if you stop contributing to your pension. It's probably not as much as you think, because of the tax benefits of pension payments. For example, if you’re part of a salary sacrifice scheme then you could receive that extra boost as income, meaning it’ll be subject to income tax and National Insurance.

2. You’d miss out on help from the government

The government also gives you a boost when you pay into a personal or workplace pension – by giving you tax benefits. This means that your pension payments may cost you less than you think.

For example, for a basic-rate taxpayer paying into a personal pension plan in the current tax year, a monthly payment of £200 a month only costs £160 in practice. The government provides the extra £40 in tax relief. So you could be missing out on an extra £480 a year. Higher-rate and additional-rate taxpayers may be able to benefit even more.

The tax benefits on pension payments may be delivered to you in different ways, depending on what type of pension plan you have and how much income tax you pay. But the over-arching point is the same: if you stop your pension payments, you turn down an extra boost from the government. That doesn’t happen if you cancel a subscription or cut down on takeaways and meal deliveries…

3. The hit to your future plans could be bigger than you think

Without getting too mathematical or technical, it’s worthwhile to think about the benefits of compounding when deciding whether to stop paying into a pension. Compounding has been called ‘the eighth wonder of the world’ and it basically means that when you leave money invested, you can potentially achieve growth not just on the original sum but on the growth as well. The benefits of this can be especially powerful if you’re still a while away from retirement age.

Halting your pension payments means losing or reducing some of the compounding effect that happens if a pension pot grows over time. This could mean missing out on potentially substantial sums after 10, 20 or 30 years. Remember, though, that the effect of compounding is never guaranteed: the value of investments can go down as well as up in value and could be worth less than paid in.

4. Stopping now may mean working longer

If you’re struggling to pay bills or balance your budget, the risk of a reduced pension pot may seem very remote: there’ll be plenty of time to catch up when things get easier…

It’s worth bearing in mind, though, that many people are already putting aside too little to provide the retirement lifestyle they want. Cutting your payments now could impact your future lifestyle further, or mean you have to work much longer to build up your pension pot.

Useful for your decision-making on this could be our Retirement Tool and Pension Calculator. The first will help you work out what you may need to fund your ideal retirement; the second shows the potential effects of topping up or cutting your current payments. 

When thinking about your retirement plans and the size of the pension pot needed to fund them, you might also factor in that, generally, most of us are living longer. A 35-year-old woman today has an average life expectancy of 88 and one in four chance of living to 96. It’s only very slightly lower for a man. You can find out your own life expectancy, and chance of reaching 100, with this handy calculator from the Office for National Statistics. 

5. The State Pension may not cover your needs

When looking at the support available to the elderly – from concessions on travel to help with winter fuel costs or TV licences – it may be tempting to think that retirement will be an easy financial ride, particularly when the State Pension is there to support you. 

But before reducing or stopping your pension payments, check out whether the State Pension would cater for the retirement date or lifestyle you hope for. Firstly, it won’t be available until your late 60s. Secondly, the new flat-rate State Pension pays less than £200 a week or £10,000 a year – that’s far less than a job on National Minimum Wage.

Looking after your future self

Pensions and retirement may seem a long way off when you’re facing soaring food prices and heating bills, but your future self may thank you for saving into a pension plan now. 

It can be hard to re-start a savings or pensions habit once you have lost it, so why not keep going if you can? For ideas on how to manage your finances and make your money go further, read our articles on financial wellbeing and dealing with the rising cost of living. You can also use our pension guides and tools and app to get more familiar with your pension
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The information in this article should not be regarded as financial advice.

Laws and tax rules may change in the future and your own personal circumstances, including where you live in the UK, will have an impact on tax.

The information here is based on our understanding in July 2022.