Suspending your pension contributions? Remember the magic of compounding
Think very carefully before suspending your pension contributions, or you will miss out on compound interest – the “eighth wonder of the world”.
For anyone struggling with the financial impact of the Covid-19 crisis, saving for a retirement potentially still many years off may feel like a low priority. But while it may be tempting to cut back on pension contributions, or to stop saving altogether for a time, the long-term cost of doing so may be much higher than you realise.
The problem is particularly acute for younger savers, with the effect of compound interest multiplying the impact of missing pension contributions. Figures from the pension provider Aegon suggest that a 25-year-old saver who is a member of their workplace pension scheme but suspends contributions for three years could see their final pension fall by 7% as a result.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
An average saver who suspends pension contributions for three years would see their income boosted by around £4,000 over the whole period. But taking into account lost tax relief, missed contributions from an employer, and investment growth foregone, the impact on their final pension fund would be almost four times as high.
Get back on track quickly
Pension experts also worry that people cutting back on pension contributions today may not get round to increasing their savings for many years, even when their financial position improves. Again, the impact could be dramatic. A 25-year-old saver who reduces their pension contribution by just 1% could lose 9% of retirement income if they never get round to raising their savings once again.
That would rise to 18% for members of workplace pension schemes whose employers match their contributions and therefore cut back on what they pay in. With some official data suggesting that younger people’s finances have been disproportionately affected by the Covid-19 crisis, some advisers now fear a significant long-term pensions problem. But while pension contributions paid early in life have the greatest effect on final pension income, older savers suspending contributions will also face significant impacts.
Inevitably, some people will feel they have no choice but to cut back on retirement saving given the state of their finances in the current environment. But if so, it’s crucial to get back on track as soon as your circumstances allow – and to consider topping up pension contributions, if possible, to begin to reduce the shortfall.
-
Hargreaves Lansdown shakes up fees in biggest change in 10 years – what does it mean for you?Hargreaves Lansdown is lowering its headline fee from 0.45% to 0.35% – but not everyone will be happy with the new fee structure, it’s been suggested.
-
Michael Moritz: The richest Welshman to walk the EarthMichael Moritz started out as a journalist before catching the eye of a Silicon Valley titan. He finds Donald Trump to be “an absurd buffoon”
-
ISA reforms will destroy the last relic of the Thatcher eraOpinion With the ISA under attack, the Labour government has now started to destroy the last relic of the Thatcher era, returning the economy to the dysfunctional 1970s
-
Investing in forestry: a tax-efficient way to grow your wealthRecord sums are pouring into forestry funds. It makes sense to join the rush, says David Prosser
-
'Expect more policy U-turns from Keir Starmer'Opinion Keir Starmer’s government quickly changes its mind as soon as it runs into any opposition. It isn't hard to work out where the next U-turns will come from
-
Why pension transfers are so trickyInvestors could lose out when they do a pension transfer, as the process is fraught with risk and requires advice, says David Prosser
-
Modern Monetary Theory and the return of magical thinkingThe Modern Monetary Theory is back in fashion again. How worried should we be?
-
The coming collapse in the jobs marketOpinion Once the Employment Bill becomes law, expect a full-scale collapse in hiring, says Matthew Lynn
-
How pet insurance can help cut the costs of vet billsYou can temper the expense of vet bills with pet insurance. There are four main types to consider
-
Rachel Reeves's punishing rise in business rates will crush the British economyOpinion By piling more and more stealth taxes onto businesses, the government is repeating exactly the same mistake of its first Budget, says Matthew Lynn
