Pensions are long-term savings and so when making decisions about them you need to consider what will be best for you in the long run. With the cost of living crisis and market volatility over the last year, saving into your pension may feel unaffordable or too risky. But lowering your contributions or opting out of your pension completely could have a huge impact in later life and you could end up missing out on savings growth. Here’s why it’s a good idea to keep contributing to your workplace pension:
- Extra payments from your employer. Your employer pays contributions to your pension account. If you stop your payments, it’s like turning down free money!
- Tax relief. You normally get tax relief on pension contributions. This means for every £1 you put into your pension it actually only costs you 80p – the other 20p is tax relief (or only 60p if you pay tax at 40%).
- Compounding. Your pension account reinvests any returns you make on your investments to increase its value. For example, if you saved £1,000 into your pension fund in year 1 and this had an assumed growth rate of 5%, you’d earn £50 in year 1, £52.50 in year 2 and £55.13 in year 3. Lowering or stopping your contributions could mean you miss out on this long-term growth.
This might be a good time to check how far your benefits will go in retirement. You can use an online budget planner to help you work out how much you might need in retirement. You can find one on your member website.
As a guide, a single person will need about £12,800 per year (or £19,900 for a couple) to ensure your basic needs are covered with a little left over, assuming you have no rent or mortgage payments to make. Find out more about the cost of living in retirement on the Retirement Living Standards website - www.retirementlivingstandards.org.uk
It’s also important to remain vigilant to help protect yourself from pension scams. Watch out for cold-callers, anyone claiming they can help you to access benefits earlier than age 55 or offering guaranteed high returns on your pension investment.
You can find out more information by going to the ScamSmart website – an FCA hub for information on how to avoid investment and pension scams. Visit www.fca.org.uk/scamsmart for more information.
You can report a scam to the FCA by contacting their Consumer Helpline on 0800 111 6768 or by using the reporting form at www.fca.org.uk/contact