Should I pause my pension contributions during the coronavirus crisis?
Cost cutting will be high on the agenda for many families at the moment and one obvious way to save some money is pausing your pension contributions.
Most workers are now enrolled in a workplace pension under the government’s auto-enrolment scheme. Qualifying employees must pay at least 5% of their salary into their pension, while employers must contribute at least 3%. Savers also get tax relief from the government.
Auto-enrolment, however, is not compulsory. You can opt out, which could be an attractive option for people concerned about their financial situation during the coronavirus crisis. But is it a good idea?
The simple answer is no – if you can avoid it.
Tom Selby, senior analyst at AJ Bell, says: “While now is clearly an uncertain time for people, opting out of automatic enrolment is rarely a sensible decision. In doing so you’d essentially be turning down free money in the form of your matched employer contribution, as well as the additional boost of pension tax relief.
“Furthermore, once you have made that contribution the money is yours – albeit you won’t be able to access it until your mid-50s – so even if you lose your job your auto-enrolment pension will remain your property.”
Suspending your pension contributions may feel like an easy way to save money, but experts say you should exhaust other options first.
“Before you consider it, it’s worth cutting out all the luxuries you don’t need, and shopping around to cut the cost of essentials to the bone,” says Sarah Coles, personal finance analyst at Hargreaves Lansdown.
Selby adds: “Those with high cost debts might be tempted to opt-out of auto-enrolment and use the money they save to pay these off. While paying off such debts as quickly as possible is sensible, you should first write down a monthly budget and see if you can reasonably cut costs anywhere else before turning to your workplace pension contributions.”
However, for some people pausing contributions for a few months makes sense.
Coles says: “This includes people who are working, but other people in the household have seen their income reduce or fall away entirely, so that even after cutting costs dramatically, you still have trouble covering the bare essentials.
“Pausing pension payments should come before you have to get in touch with companies you owe money to in order to arrange payment holidays or reduced payments.”
Anyone who decides to stop their contributions is urged to keep the break as brief as possible to avoid damaging their future retirement income.
Kate Smith, head of pensions at Aegon, says: “For those employees who decide to pause their contributions, they can ask their employers to allow them to opt back in at any time, and restart paying contributions. As soon as they do this, they will start receiving an employer contribution again.
“The longer employees are out of the pension scheme the more difficult it will be to make up the savings gap, which could have an impact on their retirement plans.”
What happens to my pension if I’ve been furloughed?
If you have been furloughed, auto-enrolment contributions made by your employer will be covered by the government’s Coronavirus Job Retention Scheme.
The government will pay the minimum 3% auto-enrolment contributions based on your furloughed salary, which will be capped at £2,500 a month.
Anyone earning above this amount could see their pension contributions drop significantly, according to AJ Bell.
Someone earning £50,000 and contributing the auto-enrolment minimum in 2020/21 who is furloughed on £2,500 a month will see their monthly pension contributions fall from £291.73 to £158.40.
Someone on average UK earnings of around £30,000 who is furloughed will see their monthly pension contributions drop by 20%.
It’s worth remembering that you can’t pause your payments and still get your employer contribution. If you choose to stop paying the full level of auto-enrolment contributions, you lose the right to the employer contributions. If you pay less than the minimum auto-enrolment contribution, you also lose the right to employer contributions.
Some employers may allow employees to pay less than the minimum contributions – but this will be up to the employer.
This is the same regardless of whether you are furloughed or not.