Experts are sounding the alarm that pensioners could be £62,000 poorer as a result of such a decision. A workplace pension scheme helps employees save for their retirement outside of the state pension. Workers have the option to opt out of these schemes but doing so will lead to consequences down the line, according to pension analysts.
Pete Glancy, the head of policy, pensions and investments at Scottish Widows, is urging people to be aware of the “impacts of this short-term decision”.
He explained: “Inflationary pressures are always challenging. It can be hard for savers to mitigate against them – but thankfully, there are some small ways to safeguard your future finances from today’s rising costs.
“Maintaining regular contributions to a private pension is one of the best tools, as it’s an incredibly tax efficient way to maximise the amount you’ll have in the future, when the time comes to retire.
“Faced with rising costs of living, it can be tempting to cut pension contributions. However, the impacts of this short-term decision on your future wealth would be stark – particularly for women.”
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The finance expert shared an example to illustrate how much someone could lose if they make the decision to stop making pension contributions.
In this hypothetical situation, a 40-year-old single woman has chosen to permanently reduce her pension contributions by just £1,824 a year.
After doing this, she would be £62,000 poorer by the time she reaches her eventual retirement.
This is also accounting for the projected investment returns that would be sacrificed from no longer making contributions.
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According to Scottish Widows’ head of pensions, there should be more options available for people when it comes to their workplace pensions.
Mr Glancy added: “To help savers at this difficult time, I’d like to see the rules relaxed slightly on employer contributions.
“The situation would be improved by allowing lower paid employees to temporarily alter their employee pension contributions when their financial situation changes – without losing their right to an employer-paid pension contributions.
“Employer pension contributions are effectively deferred pay, and anyone struggling to make ends meet shouldn’t be penalised further down the line for needing to keep hold of more of their money now.”
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What are workplace pensions?
Through these schemes, a percentage of someone’s wages are placed into a pension automatically every payday.
In the majority of circumstances, an employer also contributes money into the pension scheme for their workers, who may also get tax relief from the Government.
How much a worker and their employer pay towards the pension depends on what type of workplace pension scheme they are in.
It also depends on whether they have been automatically enrolled in a workplace pension or they joined one of their own volition.
Money via tax relief is awarded to employees if they pay Income Tax and place cash into a personal pension or workplace pension.
For most automatic enrolment schemes, workers will make contributions based on their total earnings between £6,240 and £50,270 a year before tax.
An individual’s total earnings include their salary or wages, bonuses and commission, overtime, statutory sick pay, statutory maternity, paternity or adoption pay.
If someone has voluntarily enrolled into a pension scheme, their employer must contribute the minimum amount if they earn over £520 a month, £120 a week or £480 over four weeks.
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