Workers might be tempted to pause their workplace pension contributions during the cost of living crisis – but this could be an expensive mistake when it comes to your retirement
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Workers who pause their pension contributions during the cost of living crisis risk losing out on thousands of pounds in later life, an investment firm has warned.
Families are facing huge financial pressures due to rising bills, which means they might be tempted to put less toward their pension.
It is compulsory for employers to enroll their staff into workplace pension schemes.
The minimum contribution that you have to go into your workplace pension each month is 8% – this is made up of a 5% contribution from your take-home pay, and 3% from your employer.
You will be automatically enrolled into a workplace pension scheme if you’re aged between 22 and the state pension age, and earning at least £10,000 a year.
However, even if you are eligible and are automatically enrolled, you can choose to opt out.
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How to prepare for retirement
The main reason people decide not to be enrolled in a workplace pension scheme is because it lowers their take-home pay.
But even though your pay each month is lower, the money is still yours – you’re just putting it away for later life.
For those who may choose to opt out of their workplace pension to give their pay a little boost during the cost of living crisis, investment firm Aegon is warning how this could cost you thousands of pounds.
Aegon analysis shows skipping your pension contributions for one year could mean you miss out on £4,600.
If you opt out for two years, you could lose £9,100, and for three years, you could miss out on £13,600.
Of course, the exact amount you’re putting away into your pension each month depends on your salary and how much you are contributing.
Aegon says these figures are based on a 25-year-old on an average salary of £29,000, and making pension contributions of £75 a month.
The figures are also based on this amount increasing each year by 3% and investment growth 4.25%.
Your workplace pension is separate from the state pension.
Kate Smith, head of pensions at Aegon said: “Those looking to cut back on their pension contributions should carefully consider the long-term effects before making any decisions.
“While there may be a small immediate boost to take-home pay, Aegon analysis shows it could leave you thousands of pounds worse off in retirement.
“What’s more, employees who pause pension contributions will very likely lose valuable employer contributions which help to boost retirement savings.”
Energy bills were the biggest hit on household bills last month, after the regulator Ofgem hiked its price cap for those with typical use by £693 on April 1.
There are also increased council tax bills, water bills, broadband and mobile costs to contend with, as well as record petrol and diesel prices.
On top of rising bills, workers and employers are paying more in National Insurance following a 1.25 percentage point increase.