I’m struggling to pay my bills and considering opting out of my workplace pension scheme. What impact might this have on my retirement? I’m 25, earn £30,000 and currently pay 8% of my total salary into my pension (4% from me, 3% from my employer and 1% from tax relief).

Ben

Tom Selby, AJ Bell Head of Retirement Policy, says:

The rising cost of living is forcing millions of people to review their finances and consider areas where they can cut back. With inflation running at over 11% and expected to remain high for the next 12 months, it is inevitable some will consider saving for the long-term to be less of a priority.

Nonetheless, stopping your pension contributions is a major step. You will be forgoing upfront tax relief and tax-free investment growth, plus contributions from your employer.

So, before stopping your pension contributions, review your finances to make sure there aren’t any alternative savings you can make.

If you feel you have no option but to opt out of your workplace pension scheme or cut back on other forms of retirement saving, you should aim to have a plan to restart as soon as you can afford to. The more years you miss or the longer you put off restarting pension contributions, the harder it will be to build up a decent-sized fund.

Let’s consider someone in broadly your circumstances – a 25-year-old earning £30,000 a year who can choose whether or not to join their workplace pension scheme, which comes with a contribution worth 8% of their total salary (4% from the employee, 3% from the employer and 1% via tax relief).

It’s worth noting this is slightly higher than the minimum under automatic enrolment rules, which require a minimum contribution of 8% of ‘qualifying earnings’ (which for 2022/23 is all earnings between £6,240 and £50,270).

Throughout, we’ll assume the person’s salary grows by 2% per year and their investments grow by 4% per year.

If they start contributing 8% a year from age 25 until age 68 (their anticipated state pension age), they could have a pension pot worth £403,000.

If, however, they delay saving in their workplace pension until age 28, if all other assumptions are unchanged, they could end up with a fund worth around £363,000 at age 68.

In other words, missing out on long-term compound growth on those three years of contributions has resulted in a final pension pot worth £40,000 less.

To make up for the lost time and get back to a fund worth £403,000, the person will need to contribute an extra 1% a year to their pension in total, with 0.8% coming from their own pocket and 0.2% via basic rate pension tax relief.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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