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There’s no sugar-coating it: we’re all feeling the financial sting of the cost-of-living crisis. And this time, there are no quick-fix hacks that are going to ease our money anxiety – with over 45% of UK adults struggling to pay their bills, mortgages, and rent, according to the ONS, a simple ‘skip the morning oat latte or Friday-night trip to the pub’ isn’t going to cut it.
Look, we get it. When money is this tight, it can feel increasingly difficult to save and plan for your future – many millennials can’t even budget for next month’s grocery bill right now, let alone their retirement. In fact, one recent study found that millennials feel less in control of their finances than any other generation, and 34% are considering reducing their pension contributions, while 26% may have to opt out altogether.
But though this may provide you with some extra cash right now, it’s important to consider how it will affect your retirement fund. “Now may not be the right time to be putting more money into our pension when we’re prioritising our day-to-day spending, but it’s important to remember that just a short gap in pension contributions could mean tens of thousands of lost income in retirement,” says Samantha Gould, Head of Campaigns and Female Financial Adviser.
Here’s every question you have about your pension during the cost-of-living crisis answered…
Q: Where can I turn for help during the cost-of-living crisis?
A: 11.8 million employees in UK are having severe money worries at the moment, and it impacts pretty much every aspect of our lives, from our work to our mental wellbeing. “It can feel scary asking for help, but do reach out if you’re struggling,” says Samantha. “The government has resources to help, such as the Money Helper service, which advises on dealing with credit cards, mortgages, savings, pensions (via its Pension Wise service) and so on. Ask your workplace about employer/employee schemes and what benefits – such as Employee Assistance Programme (EAP) – are available to you.”
Q: I’m short of money right now. Can I stop paying into my pension?
A: The short answer is: yes but focus on opting back in as soon as you can. “You are able to opt-out of your workplace pension at any time, and while it’s great to be saving for your retirement, now is not the time for a lot of us – there are other priorities during the cost-of-living crisis,” says Samantha. “Just set a diary reminder every three months to think about when you can [start adding] into these savings [again], rather than forgetting about it – and do so as soon as possible. When you’re ready to start paying in again, just speak to your employer.”
Q: How much of an effect will temporarily opting out really have on my future finances?
A: This is of course dependent on a number of factors, including your income, how much you currently pay into your pension, and how long you choose to opt-out for. But don’t forget that some of the big advantages of pensions are tax relief, your employer matching your contribution, and compound interest. “A pension is designed to be a long-term investment and the magic of saving into a pension is that you benefit from compound interest; that is, built-up interest over time,” says Samantha. “So the longer you invest, the better.”
To illustrate how this would look in practical terms, Samantha gives the below example:
- 30-year-old Priya earns around £35,000 a year
- She pays 5% of her salary into her pension savings
- Her employer adds another 5%
- If Priya opts out for two years, this would be £4,601 in missed contributions
- Add in compound interest, growth and inflation over a 35-year period, and this would equate to around £25,000 less in her pension savings when she wants to retire
Q: What can I do that impacts my pension minimally but gets me more cash now?
A: Many of us can’t put aside as much money as we’d like at the moment, but as long as you’re keeping up with your workplace pension contributions, you can be safe in the knowledge that you’re saving some money for retirement, and you don’t need to do anything more. “With the current cost-of-living crisis, it’s good to build up a ‘rainy day’ savings buffer in case you do need more immediate funds,” says Samantha. “My favourite budgeting tool is the 50/30/20 rule:
- 50% of your income goes on ‘needs’: essential living expenses such as rent/mortgage, bills, food and transport to work.
- 30% of your income goes on ‘wants’: discretionary spending, such as eating out, shopping, trips and subscriptions.
- 20% of your income goes on savings or debt: paying off debt beyond minimum payments, putting money into a savings account, investment or pension fund.”
Q: Does my situation change if I work part-time?
A: If you’re part-time, you’re just as entitled to a workplace pension as a full-time employee, though because you’re working fewer hours, the amount in your pension pot will also likely be less. “You will only be automatically enrolled in your workplace pension scheme when you turn 22 and earning over £10,000 in a single role,” explains Samantha. “If you are part-time and earning less than this, you will need to ask your employer to ‘opt in’. Depending on how much you earn, your employer may not have to contribute to your pension so that’s why NOW: Pensions is lobbying the government to remove the £10,000 threshold as we think workplace pension saving should be accessible to everyone in work, regardless of age or salary.”
Q: Can I just use my pension savings now to help with the cost-of-living crisis?
A: “Current rules state that you cannot access your pension savings until you are aged 55, and then you can only access 25% tax-free – anything beyond this and you’ll be taxed at your nominal rate (your tax bracket),” explains Samantha. “After that, you can start drawing down on your pension from your retirement age, which is currently age 66. This age usually increases to reflect that people are living longer and will be age 67 by 2028. So, realistically, you will not be able to draw any income from your pension until your retirement.”
For more information and advice on paying into your pension during the current cost of living crisis, click here
Samantha Gould is Head of Campaigns and Female Financial Adviser at NOW: Pensions
