Funding your retirement in a ‘cost of saving’ crisis

In the current environment of high prices and rising interest rates, saving for retirement can seem little short of a luxury. But with state pensions increasingly deemed insufficient for a comfortable retirement, private pension savings are becoming an ever more critical part of long-term financial planning.

Against the backdrop of a well-publicised ‘cost of living’ crisis, concerns are growing that many people have paused or cancelled their regular contributions to their pension savings. Why is this so worrying, and are there ways to work around these competing financial priorities?

Why should I prioritise pension savings?

There is competition for our financial resources at all stages of life, but these competing priorities are often most acute early in one’s career. Amid aspirations like saving to get onto the property ladder and paying down student loans, or the expenses associated with a growing family, pension savings can often take a backseat. This is unfortunate, as the contributions you make to your pension scheme in the earliest years have the longest period in which to attract investment growth, in turn making the largest contribution to your overall pension fund over time.

It’s important to remember that no investment ever comes without risk, but workplace pensions and private pensions are widely accepted as good long-term options for building up your retirement savings. If you work for a company in the UK, then your employer is already paying into your pension on your behalf, but you can make additional contributions yourself. Similarly, if you are paying into a separate private pension, the higher your payments into the scheme, the better the chance that you will accrue a healthier pension pot over the long term.

You should of course think carefully about whether or not you can afford to make additional payments, and we would always recommend taking advice to ensure that you understand the risks, limitations and processes involved. But what are the potential benefits?

• Paying extra into your pension can help you to build your retirement savings more quickly. The additional time these savings spend in your pension pot also means they can be put to work for much longer in search of growth.
• You can claim tax relief on contributions to private pensions, including additional contributions to workplace pensions, worth up to 100% of your annual earnings.
• Some employers will match the additional contributions you make to your workplace pension. This can supercharge your retirement savings – think of it like a pay rise for your future self, while your present self makes the most of the associated tax relief.

Should I pause my pension savings to prioritise shorter-term needs?

In theory, at a later point in your life/career, you are likely to have access to a greater amount of disposable income. Perhaps your mortgage has been paid off entirely, or paid down to such an extent that your monthly payments are much lower. This is often a time when retirement seems nearer, creating a greater sense of urgency around savings.

However, the rising cost of living is making it challenging to commit to pension savings. As energy and food bills rise, many savers are looking carefully at their regular outgoings and prioritising their more immediate needs. Most recognise that saving adequately for retirement is key to their financial planning, but money can only stretch so far, and for many it ranks lower down the priority list when finances are stretched.

A couple of decades ago, hefty penalties may have been incurred if pension contributions were paused or stopped completely. This is no longer the case, meaning that contributions to a personal pension can be paused for a period, if your finances cannot stretch to cover them. If you’re considering pausing your pension savings, which pitfalls should you watch out for?

• Some workplace pension schemes include provision for a minimum employee contribution, in which case pausing your own payments could also lead to the loss of the employer’s contribution. (If you’re making the kind of additional voluntary contributions outlined above, it should be possible to simply cease making these until such time as they are affordable again.)
• When it comes to ‘defined benefit’ schemes, detailed advice should be sought before ceasing your contributions, as in some cases it may not be possible to re-join the scheme, and any new membership may be on less favourable terms.
• Since the benefits of your savings should accumulate over time, any pausing of contributions can have a material impact on your final pension benefits.
  These are just a few issues to consider, and we would strongly recommend that you take advice before coming to a decision.

These are just a few issues to consider, and we would strongly recommend that you take advice before coming to a decision.

Can I make up for lost pension savings later?

There’s no doubt that this is a difficult savings environment, but making up for lost pension contributions further down the line can be challenging. Even a short pause can make a surprisingly large dent in your retirement funds.

Rather than ceasing to make pension contributions entirely, it may be more sensible to consider whether these can be reduced to a more affordable level for the time being. If this is not possible, then try to have a clear aim as to when you can restart your pension contributions, and if feasible and sustainable, restart at an increased level to help to make up the shortfall.

It is possible to carry forward unused annual pension allowances from the previous three tax years. In any single year, you can contribute up to a maximum of 100% your earnings, so when combined these allowances can be quite sizeable. You must use up the current year’s allowance first, before looking back to the earliest of the three previous tax years and topping up to the annual allowance/maximum limit for that year (taking account of any contributions already made in any given year). This can be quite complicated and we recommend seeking good financial advice before committing to a course of action.

What if I don’t want to lock my money away?

Pension schemes are attractive prospects for their generous tax relief and long-term tax-free potential growth prospects. However, these savings can seem very ‘locked away’, and many people are uncomfortable about the idea of building up savings to which they won’t have access until their late 50s (under current legislation). What if, once set aside, that money is suddenly required for short-term needs?

If inaccessible savings are thoroughly beyond your comfort zone, then there are alternative approaches to building savings in a tax efficient way, whilst keeping that money accessible to you in the short term. For example, individual savings accounts (commonly known as ISAs) offer tax free savings. ISAs do not offer the tax relief benefits of pension contributions, but by foregoing tax relief over the shorter term, ISA savers can build their savings in a more accessible way. If – further down the line – you find that you can afford to part with these funds after all, it may be worth adding these to your pension pot as a lump sum contribution. Again, we would recommend taking good financial advice before acting.