In light of Pension Awareness Day next week (October 31), experts at a leading Midlands wealth management firm are urging people to think long-term and protect their pensions during the cost-of-living crisis.
Glen Callow, managing director at Prime Wealth, which is part of Prime Accountants Group and has offices in Solihull, Coventry and Birmingham, said the latest energy cap price rise of 80 per cent from October 1 was the latest blow in what has already been an incredibly difficult financial year.
He said the rising cost of living was forcing people to make snap decisions about where they can save money, including looking at their pensions.
According to a recent survey, five per cent of UK adults have already stopped contributing to their company pension due to the cost-of-living pressures, with a further six per cent reporting they were actively thinking about pausing their pension contributions.
Glen said: “Pausing pension contributions should be the last thing on anyone’s list when it comes to cutting costs. Pensions are a goldmine for securing a safer future, not only because of the money you invest but the free money and tax-free relief you receive through it.”
Glen said while lowering contributions may seem like a quick win to get some extra cash, there are three main reasons this isn’t the right decision:
Free money
He said: “Pension contributions are simply money you earn today, put aside for the future in the shape of a tax-free pension fund. If you work within a company, individuals will pay on average five per cent of their salaries with employers contributing three per cent; equally free money.
“All this money is entered into a capital gains and income tax-free environment. When you reach the age of 55 or 57, depending on when you were born, you can withdraw 25 per cent tax-free, with the remainder subject to income tax as this becomes your ‘salary’.
Tax relief
“The effect of tax relief is often misunderstood. A base rate taxpayer effectively receives a 25 per cent uplift versus non-pension saving and for a higher rate taxpayer, this is 66 per cent. Any personal investment paid after income tax would have to work very hard to catch up.”
Lost investment and effects of government help
“Pausing pension contributions will have huge effects on compound interest, which is the result of receiving growth on your previous year’s growth.
“By stopping pension contributions for a sustained period of time, your pension savings would not only miss out on the contributions you make during the period, but would also miss the benefit of any growth achieved over the future years and the subsequent compounding of that growth.
“Albert Einstein once said, ‘Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it’.”
Potential shortfall of pension
“Regular contributions increase the size of a pension pot, which attracts interest. This interest is reinvested and will go on to attract more interest, making more money for the individual.”
With life expectancies growing, Glen said that along with years lived with ill health, pensions and a financially secure future have never been more important. Pausing pension payments could cause irreparable results for retirement, which can span for nearly three decades of a person’s life.
He said it is vital for individuals to think long-term when it comes to trying to implement savings as costs across the board continue to soar.
He added: “This not only relates to pausing pensions but the temptation to take your pension contributions to try a ‘get rich quick’ scheme with unregulated assets such as digital tokens and cryptocurrencies.
“Instead, consider how much harder your savings would have to work should they be depleted by tax both initially and throughout the life of your pension!”
