In recent months we’ve all been hit in some way by the rising cost of living. At times like this, many of us seek to reduce household expenses.

The Office for National Statistics (ONS) reports that as a response to higher costs, six in ten people are spending less on non-essentials. Half of those surveyed report that they’re using less energy at home and 42% are cutting back on non-essential journeys to save petrol or diesel.

Some people might be considering stopping their pension contributions to free up cash. But are pension payments ‘non-essentials’?

Is it worthwhile continuing to pay into your pension?

It may seem like a good idea to stop your pension payments to support your short term financial situation, but there are some things to consider before making any changes.

The tax relief you get is ‘free’ money

The money you pay into your pension gets you tax relief which is essentially ‘free’ money. So, if you’re a basic rate tax payer you can essentially contribute £100 into your pension and it will cost you only £80.  If you stop contributing into your pension you’ll lose the extra money and probably end up paying more in Income Tax and National Insurance, if you pay through “salary sacrifice”, in your pay packet too.

Employer contributions help your pension grow

If you’re contributing to a workplace pension, your employer is contributing  too. This means that if you stop contributions, your employer may also stop making them on your behalf.  The money you employer contributes is extra ‘free’ money and over time it can really add up.   

What could stopping pension contributions cost you?  

Choosing to stop contributing to a pension can ultimately cost you by decreasing your pension value and making it hard to catch up. Here are some examples of what might happen if pension contributions were stopped for three years.  

Case Study 1: Rachel’s personal pension

Rachel saves £100 a month into a personal pension. By doing this, Rachel could potentially have a pension pot of £36,004* in 30 years. 

However, Rachel’s expenses are rising. As part of a cost cutting exercise to manage money at home, Rachel stops contributing to her pension for three years. Stopping for three years will reduce the total value of her pension to £32,400 after 30 years.

If Rachel restarted payments after three years, she would have to contribute an additional £11 a month to ‘catch up’ to the position she was in originally.

*Assumptions: contributions gross, monthly in advance, 4% growth after charges

Case Study 2: Cameron’s workplace pension

Cameron is a member of his workplace pension scheme. Cameron’s employer matches his contributions every month. This means that every pay period, Cameron pays in £100 as does his employer. After 30 years, this could potentially result in a pension pot of *£72,008

Due to rising costs, Cameron  has decided to stop his pension payments for three years. Having checked his workplace pension rules, he has discovered that means his employer won’t be paying in either. 

After three years, Cameron would have to pay £122 each month, assuming his employer restarts paying the original amount of £100 to ‘catch up for his missed contributions and that of his employers if he wanted the pot to be worth the same, i.e. £72,008.

*Assumptions: contributions gross, monthly in advance, 4% growth after charges

How to decide what to do

It may be tempting to think about reducing or stopping pension contributions, but there can be harmful long term impacts for stopping your pension contributions.

And if you’re expecting to be able to start contributing again after taking a break, check your scheme rules before making changes as some pensions do not allow you to restart contributions once you have stopped.

Before making any changes to your pension, it’s always worth seeking financial advice. A financial adviser will be able to help you see how stopping pension contributions could affect you in the longer term, as well as suggest alternatives and create a plan for your financial future.

If you don’t already have an adviser you can find a financial adviser that's right for you.

Getting further help and support

There are a number of government schemes designed to provide additional support to people struggling with the cost of living rises. You can read more about what is available at Gov UK. You can also check the Citizens Advice Bureau to see what help is at hand in your local areas, how to get support paying the essentials and other useful information about coping in todays uncertain times. Find out more at citizensadvice.org.uk.