Pausing pension contributions could cost average earner £12,000
UKPulse Money Desk
New research indicates that stopping pension contributions, even for a short period, can significantly reduce an individual's retirement savings, potentially costing an average earner £12,000.
- An average earner (£39,000) pausing pension contributions for one year could lose £12,000 from their retirement pot.
- A 22-year-old pausing contributions for five years between ages 30 and 35 could see their pension pot reduced by £25,000.
- A single person aiming for a comfortable retirement may need a pension pot of £691,000, according to Quilter analysis.
New research from investment platform Moneybox suggests that an average earner, on a salary of £39,000, could boost their annual income by £1,000 by pausing pension contributions for one year. However, this decision could lead to a £12,000 reduction in their overall retirement savings.
The impact of pausing contributions can be more substantial over longer periods. Standard Life research indicates that a 22-year-old earning £25,000, contributing the minimum 5% with a 3% employer contribution, could accumulate a pot of £210,000 by age 68. A five-year pause between ages 30 and 35 could result in a £25,000 financial hit, while a 10-year break in contributions between 30 and 40 might lead to £49,000 less in their pension pot.
The research highlights that stopping contributions means missing out on compounding, employer contributions, and tax rebates, making it difficult to fully recover lost savings later. Pensions UK suggests a single person requires a post-tax income of £45,400 for a comfortable retirement, which Quilter analysis estimates would necessitate a pension pot of £691,000.
Why this matters: Pausing pension contributions, while offering immediate income relief, can have a significant long-term negative impact on retirement savings due to the loss of compounding, employer contributions, and tax benefits.
What this means for you: If you are considering pausing pension contributions to boost immediate income, be aware that this could reduce your overall retirement pot by thousands of pounds. Exploring alternative ways to cut costs, such as budgeting or finding cheaper deals on services, might be more beneficial for your long-term financial health.