It’s likely you will have seen media reports that food prices rose at their fastest rate on record in September 2022. According to the BBC, food price inflation jumped from 9.3% the month before to 10.6%, something largely driven by the war in Ukraine.
If that wasn’t enough, 2022 has seen energy prices skyrocket, meaning many households will now face higher bills despite government action to help ease the financial effects of the increases. Because of this, it’s likely you have seen your household expenditure rise and might now be looking for ways to reduce it.
One solution you might be considering is suspending or stopping pension contributions. While this may seem like a shrewd move, research suggests that doing so could put your standard of living in retirement at risk, even if you pause contributions for a relatively short period of time.
Read on to discover more.
Even high earners are cutting back on spending
Research by pension provider Standard Life, suggests that the majority of households across the UK are feeling the effects of the soaring cost of living and energy prices. It questioned more than 2,500 customers and found that 93% said they had been affected by increasing costs.
This will hardly come as a surprise when you consider that the Office for National Statistics revealed that inflation stood at 9.9% in August 2022, close to the highest rate in 40 years.
According to Standard Life, of those households earning up to £30,000 a year, 80% said they would need to reduce their spending and saving, compared to 72% of households with incomes of between £70,000 and £100,000 a year.
More than half of households (56%) earning more than £100,000 said they would need to cut back on spending. One way some of those questioned said they would reduce their spending was to postpone or reduce their pension contributions.
While the government’s decision to cap energy bills at £2,500 a year for two years could offer some respite, some pension holders might still be thinking of pausing contributions as a way to cut expenditure. If you’re one of them, you might want to think carefully before going ahead, as doing so could significantly reduce your standard of living in retirement, something we will look at next.
Postponing pension contributions could jeopardise your retirement
According to Standard Life, reducing or stopping contributions to your retirement fund could reduce your pension’s value by significant amounts, even after a relatively short period of time. To demonstrate this, the pension provider calculated the value of a retirement fund when the holder was aged 68, based on them earning £25,000 a year and making monthly contributions of 3% from the age of 22.
It also assumed that these contributions were boosted by a 5% contribution from their employer and an average investment growth of 6.25% a year. Salary growth was assumed to be 3% with an annual inflation rate of 2% and investment costs of 1% a year.
In this scenario the pension pot would be worth £456,893 at the age of 68. Yet the pension provider calculated that if contributions were stopped at the age of 35 for one year, the value of the pension pot would drop by nearly £13,000 to £444,129.
If contributions were stopped for two years the pension pot could be reduced by around £25,000, and if contributions were postponed for three years it could be reduced by nearly £38,000. Please note that the calculations are only intended for illustrative purposes, and will not accurately represent exactly what might happen to your pension pot.
With this in mind, let’s consider ways you could cut expenditure without jeopardising your retirement plans.
You could reduce your expenses and keep your pension on track
Working with a financial planner could help you find ways to reduce your household’s outgoings without stopping, pausing or reducing your pension contributions. The following are three ways you might be able to do this:
Reassess your spending
By looking at your essential and nonessential expenditure, and identifying ways to potentially reduce them, you may be able to lower your overheads without affecting your lifestyle. A financial planner could help you understand the best way to achieve this, allowing you to keep your retirement goals on track.
Consider merging your pensions
According to Aegon, nearly three-quarters (73%) of Britons have more than one pension pot. If you are one of them, you might want to consider consolidating them as it may help boost growth potential and could reduce costs.
A financial planner could confirm whether consolidating your pensions is right for you, explain the risks involved and whether there could be any potential costs.
This might allow you to reduce your contributions while maintaining the growth potential you need to achieve your retirement lifestyle.
Ensure you’re as tax-efficient as possible
One way you may be able to reduce your outgoings could be to reduce your tax liability. A financial planner can assess how tax-efficient your income, savings and investments are, and confirm whether there are ways you could reduce the amount you are giving to HM Revenue & Customs.
Get in touch
While these are effective ways to potentially reduce your outgoings and keep your retirement plans on track, it is not an extensive list. If you would like to discuss other ways you might be able to reduce your outgoings while maintaining your pension contributions, or helping ensure your pension meets your long-term goals, email admin@stonegatewealth.co.uk or call us on 01785 876222.
Please Note
This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article.
All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate tax advice.
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