Wealth Management

Life on hold - what if you have to pause pension contributions

Adrian Howard
May 14, 2024

Scaling back on pension savings might seem like an easy fix for short-term challenges, but don’t lose sight of your future

At a glance

  • Pausing pension contributions may seem like a good option given current cost pressures, but reducing or stopping could have long-term implications.
  • By scaling back or ceasing your pension contributions, you’ll miss out on the tax benefits – and, if you’re employed, the contributions from your employer – as well as the effect of compounding.
  • A financial adviser can help to develop a plan to manage your short-term needs without sacrificing your future financial wellbeing.

In the current economic climate – continued high inflation, rising food and energy prices, as well as a looming recession – you might be feeling pressure to compromise on your long-term financial goals so you can meet your short-term needs.

Opting out of pension contributions for a few months can be tempting for the many households struggling to make ends meet. The annual Scottish Widows Retirement Report this summer revealed that one in ten savers had already cut back on their pension contributions or stopped paying them altogether in a bid to reduce costs.1

More recently, the Pensions and Lifetime Savings Association (PLSA), which represents UK pension providers, found that one in five schemes reported savers asking about reducing or stopping their pension contributions.2

Should I pause pension contributions?

On the face of it, this might make sense. After all, pension contributions aren’t mandatory in the UK, and it could be decades before you experience the benefit of your pension savings. So, when financial pressures are intense and you’re struggling to meet basic household costs, it may well be an appropriate option in the short term.

But what happens if you stop paying pension contributions?

For many, it will be a case of deferring the pain. Because while reducing the amount you pay in – or stopping altogether – might make it easier to meet certain short-term needs, it’s a choice that could significantly impact your standard of living later in life, when you have fewer other options open to you.

What are the disadvantages of stopping pension contributions?

There are several downsides to pausing contributions, and it might be a more detrimental choice than it first appears.

For one thing, it means that you no longer benefit from the tax relief that the government pays on those contributions. You may also be missing out on the top-up payments that many employers add to employee pension plans.

“If you’re employed and you and your employer both pay in, be aware that if you reduce the amount you pay in, your employer contributions may reduce as well, and that could have a bigger impact on your future pension,” says Tony Clark, Senior Propositions Manager at St. James's Place.

Remember too that the money you contribute to a pension benefits from the power of compounding. This is the snowball effect that occurs when any growth in the investments held in your pension goes on to generate its own growth. If you stop your contributions entirely, the value of your pension isn’t just affected by the loss of the money paid in, but also a potentially significant level of investment growth.

Finding the right balance

Given those longer-term consequences, it’s worth asking yourself if pausing your pension contributions is the best way to balance your short-term needs with your long-term plans.

“Have a look at your total outgoings first, because there may be areas where you can cut spending that perhaps you hadn’t identified before, especially if you pay for a lot of things by direct debit,” suggests Tony.

In many cases, savers pause or reduce their contributions with the intention of it being a temporary arrangement. But that pension ‘holiday’ can too easily stretch into a much longer period of time – even if financial pressures ease. The danger then is that the damage to later-life savings becomes increasingly difficult to repair.

A considered approach

In the current climate, there’s a risk of you making decisions without putting steps in place to mitigate the longer-term effects. This is why it’s important to engage with your financial adviser when making changes to pension plans, says Tony.

“An adviser can show you the potential impact of reducing contributions in the long term, but they can also show you what you could do in the medium term to make up for that impact,” he explains.

A financial adviser can develop a plan with a degree of flexibility built in to help you deal with short-term crises – such as a serious squeeze on day-to-day living costs. They can also help you consider other decisions. For instance, if you’re paying into a pension and ISA, which could you cut down on first?

“If you’re struggling with the cost of living and inflation, chat with your adviser. It may be that reducing your contributions can be part of a plan where, once inflation is down and the pressure has eased, you can start to make up lost ground,” Tony explains.

The plan that’s right for you will depend on your personal circumstances, so it’s a good idea to chat to us when challenges arise. Contact us to find out how we can help.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.