The global coronavirus pandemic has taken a financial toll on businesses and individuals alike.
In the UK alone, around 7.5 million people have been furloughed and now depend on the government to receive 80% of their salaries.
Those who are able, have tapped into their savings.
Another option to save money is suspending contributions to their pension, which creates a short-term gain but could create a greater long-term damage.
Significant impact
According to advice firm The Private Office, savers who stop topping up their pension now, and do not reinstate their contributions for 10 years, could lose around 20% of their pot.
This could mean there is approximately £94,000 ($115,023, €105,224) less in it.
A person relying on that money as their retirement income will see it run out seven years earlier than intended.
Those who stop for a short period of time, two years for example, would have a decrease of just over 4% – around £21,000.
Kirsty Stone, chartered financial planner at The Private Office, said: “Stopping for a short period of time, to weather the storm and provide comfort, may not have a huge impact, but it will have some impact.
“Stopping contributions for a long time could, however, have disastrous consequences, leaving years of lost growth, and therefore a lower income in retirement.
“Not forgetting the loss of employer contributions and tax relief, which is in effect free money for your retirement.”
Save and get relief
The Private Office explains that those with a workplace scheme are eligible for immediate tax relief, and by stopping contributions they would lose out on what basically is free money going towards their pension.
To use the advisory firm’s example, “someone earning £60,000 and paying 5% into their pension with a matched contribution from their employer, would see £6,000 added to their pension per year – but the employee will only see a deduction of £2,400 per annum from their pay”.
“The £6,000 contribution is made up of:
- £2,400 personal contribution – deducted from pay;
- £600 immediate tax relief added; and,
- £3,000 employer contribution.
“In addition, as a higher rate taxpayer, with at least £3,000 in the higher rate tax band, a further £600 can be knocked off your tax bill.
“So for a pension contribution of £6,000 per year – in this example it will cost a higher-rate taxpayer just £1,800,” the firm added.
Stone continued: “We’re always told that we need to save more for our retirement so it is a huge concern that the current pandemic might derail many of our plans, without us even realising.
“The key is understanding how on track you are to achieve the things that you might want to do in retirement.”
