Is it ever a good idea to stop paying into your UK workplace pension pot?

UK workers are leaving their pension schemes or reducing how much they pay in as the cost of living crisis forces people to make hard financial choices.

Why are staff doing this?

According to trade unions, some employees say they cannot currently afford to stay in their employer’s pension scheme. Others have decided to cut their contributions to release much-needed extra cash to help with their rising day-to-day costs.

“The cost of living crisis is having a negative impact on individuals and families right now, curtailing their ability to save, invest or contribute to their pension. People are having to take these more severe measures to plug the financial gaps they face – decisions which will sadly have a negative impact on their long-term finances if they are unable to reverse them soon,” said Richard Eagling, a pensions expert at the price comparison website NerdWallet.

So stopping paying in is a bad idea?

In the very short-term it may help by providing some extra cash, and it is difficult to criticise anyone who is in a desperate situation, or worries they soon may be.

Typically, there will be a window during which a worker who has been enrolled into a workplace pension scheme can “opt out”, which means they leave the scheme and any contributions made are refunded. Alternatively, people will often be able to take a break from paying contributions at any time, or may be able to reduce the amount they pay in for a period.

But, yes, leaving a workplace pension scheme is almost always a bad idea. It means you are missing out on free money from your employer and investment growth.

How much money?

For the past decade, the UK’s “auto-enrolment” regime has required all employers automatically to enrol eligible workers into a workplace pension, which the worker and employer pay into. Under auto-enrolment, at least 8% of the worker’s pay goes into their pension pot, made up of at least 3% from the employer, 4% from the employee, and 1% tax relief from the government.

The amounts paid in by workers and companies vary hugely – many individuals and their employers are putting in a lot more than that, with some employers offering to match additional pension contributions from staff.

What are the implications for your pension of stopping payments?

It can have a particularly big impact on the pots of younger people starting out in their careers.

Penfold, a pensions platform, said that if a 20-year-old who contributes £200 a month to their scheme were to stop paying in for three years, the value of their final pension pot at retirement would fall by £28,000 – from £268,000 to £240,000 – assuming a retirement age of 67 and a 5% annual growth rate.

Pete Hykin, the platform’s co-founder, said: “It’s vital that those people who are financially able to pay into their pension continue to do so.”

What can be done?

One option would be increasing the employer minimum contribution levels, perhaps allowing staff to cut their contributions and use that money to supplement their disposable income during these difficult times.

The TUC’s long-term aim is to increase the mandatory contributions level to 15% from the current 8%, with the extra coming from the employer. But with companies facing huge uncapped increases in their energy costs, this is also a very difficult time for businesses.