October 16th, 2023

3 important steps to consider taking before cutting your pension contributions

When you sit back and dream about your ideal retirement, it’s unlikely that the subject of money crosses your mind.

Yet in reality, retirement requires the continued management of your later-life income – and a significant portion of this income is likely to be drawn from savings and investments you’ve made earlier in life.

When you see your future retirement from this perspective, your attention may be drawn to the savings you’re accumulating now. The financial habits you enact on a daily, weekly, monthly, and annual basis are all likely to determine the lifestyle you can afford when you retire.

Unfortunately, a Royal London study has found that one-third of workers have investigated stopping or reducing their pension contributions in the past two years. While tempting, decreasing your pension contributions now could have a detrimental impact on your financial stability later.

So, here are three steps to take before deciding to cut your pension contributions.

1. Work out the potential shortfall that could result from stopping contributions

The truth is, halting pension contributions could give you more take-home pay. However, you may be surprised to learn that the financial shortfall this may create in retirement could be much greater than the temporary extra funds you receive now.

Indeed, the laws of compound returns mean that, according to Royal London, an individual earning £35,000 who stops pension contributions could:

  • Boost their take-home pay by £1,404 in that year
  • Lose out on £4,092 in pension savings later.

A more than £1,000 uptick in pay could seem very attractive during the cost of living crisis – but having £4,092 less in your pension later on could have a severe impact on your retirement lifestyle.

Understandably, focusing on the delayed gratification of making pension contributions can be challenging.

So, before you go ahead and cut your pension contributions to earn more take-home pay, remember that compound returns can help even small contributions grow significantly over time.

Having this in mind may provide the motivation you need to continue making regular pension contributions throughout your career.

2. Consider reducing “here and now” expenditure

When searching for ways to reduce your expenditure amid the cost of living crisis, it could help to separate your expenses into “here and now” and “long-term” categories.

Here and now expenses might be:

  • Essential monthly bills
  • Travel and food costs
  • Leisure activities
  • Subscriptions
  • One-offs, like holidays.

On the other hand, some examples of long-term expenses include:

  • Pension contributions
  • Mortgage repayments
  • Individual Savings Account (ISA) savings and investments
  • Non-ISA investments
  • A cash emergency fund
  • Protection premiums.

As you review your finances to see where cuts can be made, looking at these two categories of expenditure might be useful.

Both contain important elements – for instance, your essential monthly bills need to remain a priority – but your here and now expenditure could also contain unnecessary elements that can be cut for now.

Whereas, your long-term expenditure, while less gratifying in the present, is all about building a robust foundation for your future. As such, protecting your long-term plan and cutting unnecessary short-term expenses could be a more productive move.

3. Form a long-term wealth strategy with a financial planner

One of the most difficult things about making regular pension contributions, particularly when everyday costs are rising, is the absence of an immediate reward.

Indeed, when your pension is an abstract concept that currently has no impact on your lifestyle, you may find it challenging to remain disciplined with your payments.

However, new research has shown that having a strong vision of your future could have active financial benefits, as you may be more inclined to respond to delayed gratification.

According to a study published by the BBC, researcher Hal Hershfield presented participants with scenarios in which they could receive a small reward now, or a larger one later. Reviewing the results, Hershfield discovered that those who chose to delay their gratification for a larger sum had more money saved up than those who chose a short-term reward.

From this, Hershfield deduced that those with a stronger sense of their future self are more likely to be disciplined savers.

If this is an area you struggle with, working with a financial planner could be of immense help. We can discuss your future goals with you, helping you to connect with your future self and forge pathways towards the targets you set.

To learn more about how financial planning could help you set achievable retirement goals, email enquiries@prosserknowles.co.uk or request a callback from one of our advisers.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

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