Pensioner surprised to find she'd lost a pension
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To cope with rising bills, many people could consider pausing their pension contributions, especially as the market is in turmoil, however this could prove very costly. Mark Devlin, Pensions Expert at M&G Wealth discussed the disadvantages of pausing pension contributions, even with finances squeezed at the movement.
He said: “Perhaps the most obvious thing to cut back on during the cost of living crisis, but perhaps the most costly too, would be pausing your pension contributions.”
He explained that many people will underestimate this action but it is a little known fact that a few hundred pounds could account for thousands lost in retirement.
He continued: “Especially if any employer matching would be lost by cutting back on your pension contributions.
“Even for those on modest salaries, employer matching can make a big impact on the final pension pot.”
A workplace pension is a way people can save for retirement, arranged and implemented by their employer.
It works by automatically placing a percentage of a worker’s pay into the pension scheme each time they get paid.
All UK employers are required to provide a workplace pension scheme and operate what is called “automatic enrolment”.
An employee must pay at least five percent of their earnings, while their employer must then contribute at least three percent.
This adds up to a total minimum contribution of eight percent.
But while many workers will simply pay the minimum and forget about their workplace pension, there could be greater financial rewards available by contributing more.
Mr Devlin gave an example of the potential loss people may make.
He explained someone earning £15,000 per annum in an auto-enrolment scheme would be paying five percent in total (£750 gross), with the three percent employer matching.
This means it’s only costing them £50 a month to get £100 a month into their pension.
If that person stopped their contributions entirely, they would gain £600 to their take home pay, but lose £1,200 in their pension, as well as the potential growth of that saving.
He continued: “If you factor in an expected four percent growth, for someone stopping pension contributions in the five years ahead of retirement, they would lose roughly £1,460.
“For someone stopping contributions 40 years from retirement, there’s a potential loss of £5,760.
“Given the figures, taking the hit from your pension funding may be a much costlier option than saving on some rarely used subscriptions, or the much vaunted daily cup of coffee from a fancy barista?”
Some employers can match or even double-match someone’s contributions beyond the eight percent auto-enrolment minimum – sometimes significantly more.
Britons are encouraged to ask the employers if they can contribute more to their pots.
He advised people to contact their HR department to ask about opting in and to find out what level of employer matching is available.
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