The cost-of-living crisis which has engulfed the UK over the last year or so has hit people in different ways. All of us have been hit with much higher energy and food bills, and a significant proportion of the population is now facing a housing cost crunch, whether that’s in the form of higher rent or bigger mortgage payments.

People have had to adjust in different ways, depending on their financial situation, and one emergency brake it seems many savers are pulling is to stop or reduce pension contributions.

A recent report from the fund group M&G (MNG) found that a fifth of savers had either reduced their pension contributions or ditched them completely, in response to the spiralling cost of living.

This may well be the tip of the iceberg in terms of the effect the cost-of-living crisis has had on all our pension wealth, when you consider that many people who may have managed to keep up their pension contributions would actually have paid in more if we weren’t facing such huge inflationary pressures.

AN UNDERSTANDABLE BUT DAMAGING MOVE

Turning off the taps to your pension is entirely understandable in the current environment. If you’re trying to free up cash in the here and now, saving money for the dim and distant future can seem a bit of a luxury. However, it’s worth acknowledging just how much a cut in contributions can harm your retirement prospects.

Permanently cutting your pension contributions from £300 a month to £150 a month can put a £105,000 dent in your retirement pot after 25 years, assuming 6% annual growth. Stopping those contributions altogether for five years can wreak similar damage, shaving £69,000 off your final pension pot after 25 years.

Pulling money from your pension boosts your spending power today but reduces your spending power in retirement, but it’s not a one-for-one replacement. That’s because your money experiences compound growth while invested in your pension, so every £1,000 withdrawn could be worth so much more in retirement.

That’s before you even factor in employer contributions to your pension scheme which often double the amount of money you put in. And then there’s tax relief to consider too. For each £1,000 you put into the pension the government adds £250 in basic rate tax relief, and higher rate taxpayers get a further £250 in higher rate relief, and for additional rate taxpayers that extra figure is £312.50.

A LAST RESORT

So, reducing or stopping pension contributions should really be a last resort when it comes to adjusting your finances to accommodate the increased cost of living. If you do find yourself going down the route of cutting your pension savings, you should try and reinstate them as soon as possible. If you stop a £300 monthly pension contribution, this will cost you £15,500 in 25 years’ time if your resume payments after a one-year pause, rather than £69,000 if you take a five-year break from making contributions.

There are now some tentative signs that the inflationary strain might be starting to lessen. For instance, figures from the British Retail Consortium found that food prices actually dropped between August and September, the first decline in two years. Hopefully that means we might start to see the pressure on household finances easing up a bit, which would allow those who have cut pension contributions to start them up again. Those lucky enough to find a bit more space opening up in their budget you may even be able to cover any lost contributions by putting some extra payments in.

A CALCULATED APPROACH

It’s a good idea to use an online pension calculator such as the one on the Money Helper website, to get an idea of the sort of income you might expect in retirement based on your current savings habits, even if you haven’t had to resort to slimming down your pension contributions. Forewarned is at least forearmed, and finding out if you need to fill a pension hole sooner rather than later gives you the best chance of successfully playing catch up.

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