Workplace pensions & the cost-of-living crisis: should I reduce my contributions?

Times are difficult right now for many of us. Nearly half of employees that we’ve surveyed in recent months are worried about the cost-of-living crisis and the impact it’s having on their finances. So, what are our options?

While reducing your pension contributions can give a much needed income-boost in the short-term, it’s important not to overlook the benefits of saving for retirement and the consequences of not doing so.

Workplace pension contributions:

• benefit from tax-relief
• may be matched up to a certain percentage by your employer and may also attract supplementary benefits like life assurance
• are invested over the course of your working life, meaning that the earlier you start contributing, the more chance you have of building a substantial retirement pot as you have the potential to benefit from compound growth.

So, it may be worth working through the following steps first before thinking about reducing your pension contributions as a last resort.

1. Do you use a budget to track your income and outgoings?

• Budgeting allows you to identify areas of overspending and helps you better manage your money. It’s the first thing any debt charity will ask you to do.
• If you don’t have one yet, there are loads of useful tools and apps available for free online.
• If you have a budget already, do you revisit it periodically to check your spending and savings goals remain relevant and realistic?

2. Look at ways to reduce outgoings and/or boost your income.

For example, could you…

• turn down your thermostat or boiler temperature by just a few degrees?
• carry out large weekly shops at a low-cost supermarket, rather than making frequent visits to a local convenience store?
• sell unwanted household items (for example clothes, electricals, furniture)?
• Check online whether you’re eligible for any additional government support packages?

3. Find out how much income you need to give you the lifestyle in retirement you want.

• To help with this, it may be worth considering PLSA’s Retirement Living Standards.
• Check whether you’re eligible to claim the new State Pension.
• Use a retirement modeller such as this one from Unbiased to calculate your current predicted pension income, desired pension income, and how much you need to be paying in to get there.

4. Speak to your employer and consider the impact of your decisions.

• Before reducing your contributions, it’s worth speaking to your employer as some may offer a dial-down option on your contributions.
• If you opt-out of your workplace pension scheme entirely, then you may also lose any life insurance benefits provided by your employer. If you opt-out of a final salary (or ‘Defined Benefit’) pension scheme, you may never be able to re-join it.
• If you’re over 50, Pension Wise can provide free and impartial government guidance about your defined contribution pension options.  

5. What next?

• If you decide to reduce your pension contributions or opt-out completely, then it’s worth setting a review date to re-evaluate this after a few months.
• Reducing or suspending your contributions can have a significant impact on your retirement income, and only a small impact on your take home pay, so we would encourage you to treat this as a temporary solution.

If you are struggling with your finances, please be sure to reach out to friends, family, your employee assistance programme, and other sources of help such as debt charities or impartial financial advisers.

Our one-page flyer ‘Guide to managing your finances during the cost of living crisis’ contains further resources and website links which you may find helpful.