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Thinking of cutting back on your pension – Here are five reasons to avoid it

According to new Government figures pension participation has continued to rise in the last year despite the challenges of the pandemic, with 88 per cent or 20 million eligible staff now saving in a workplace scheme.

On top of this, many individuals have continued to take advantage of the benefits of saving into a pension by opening or topping up separate private pensions.

However, a growing number of finance experts fear that the current cost-of-living crisis and the volatility of financial markets may lead some savers to reduce their regular contributions, or for those that are eligible, dip into their existing funds to support everyday expenses.

Pension saving has historically been one of the best ways to beat inflation, especially if you have a savings buffer and do not need to access your pension before the age of 55.

Although you may be tempted to cut back on your pension or withdraw money from it, here are five reasons not to:

  • Tax relief – Saving into a pension is a great way to reduce the amount of tax you pay each year, by minimising your taxable income. Your pension contributions are also supported by tax reliefs helping to boost them by 25 per cent for basic rate payers or nearly 68 per cent if you are a higher rate taxpayer.
  • Weathering the storm – Pensions can provide a relatively safe harbour during periods of economic volatility. Pensions tend to be managed through less risky investments and are typically diversified so that an individual’s pension savings are not diminished.
  • Compounding – One of the greatest advantages of saving into a pension is the impact of compounding returns, especially for younger individuals, as they enjoy gains built upon their previous gains.
  • Tax-free cash sum on your retirement – All pension schemes allow members to convert 25 per cent of their pension into a tax-free cash sum once they reach 55 (or 57 from 2028). The more you save now, the greater the amount of money you can withdraw at this point.
  • Use it or lose it – Each year most savers have a tax-free pension allowance of £40,000. Although this amount can be carried over two years, if the full amount isn’t utilised it is lost. If you aren’t already making the maximum contribution each year, you could effectively be missing a big opportunity to cut your tax bill further.

If you decide to save more, you must be investing your money in the right place. If savers aren’t sure if their current pension is right for them, they should review it and consider:

  • The current fund value
  • The current transfer value, including penalties
  • Whether the pension is in a final salary or defined contribution scheme
  • If there are any guarantees
  • The pension projection at retirement age.

If these points don’t match your ambitions for retirement, it might be time for a change. Seek professional independent financial advice to make the most of your pension contributions.