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Keeping Pension Savings on Track in the Cost of Living Crisis

Gresham Wealth

When times are hard financially, it is understandable to look for ways to cut costs. In an attempt to try and reduce monthly outgoings, it has been reported that some are looking to cut back on their long-term savings.

Research from Aviva has shown that almost one in four (23%) British pension holders are considering withdrawing money from their pension, opting out of automatic enrolment, or planning to reduce, pause or stop their contributions.

As with any decision relating to your long-term savings, it’s important to weigh up the pros and cons when it comes to your pension.

Here, we look at why pension contributions should be prioritised, even in these times.

Reducing contributions now could take many years to claw back

Any reduction in pension contributions is likely to have a disproportionately damaging effect on your pension pot in the longer term.

For someone in their 30’s, it can be tempting to delay making pension contributions given that retirement is still some thirty years away. However, by delaying it just one year, they could be losing out a lot due to the nature of compound interest. The longer pension money is left to accumulate, the more power it has to grow,  boosting investment returns over the long term. By delaying contributions there will be less growth to reinvest, which could result in a significant reduction in the overall pot.

Remember, the general rule of thumb for calculating an appropriate level of pension contribution is to take your age, halve it, and this number, as a percentage of your pre-tax salary, is the amount you should contribute to pensions each year. For example, a 35-year-old should be contributing 17.5% per annum of their pre-tax salary. Although this figure seems a lot, employer contributions are also included so you only need to fund the rest.

If your level of pension contribution drops below this, and you don’t have other investments or assets working for you, you are unlikely to be on track for the type of retirement you are ultimately aiming for.

Making the most of the current rules

For years, in the run up to the Chancellor’s Spring budget and Autumn statement, speculation around pension contributions being made less advantageous is mooted. Whilst the previous freezing of the annual and lifetime allowances has been labelled as a ‘stealth tax’ by many, the rules around tax relief on personal pension contributions, which are widely considered to be generous, have remained unchanged – for now!

Therefore, consideration should be given to maximising allowances and tax reliefs each year, whilst they are still available. The carry forward rules shouldn’t be overlooked either, as these allow individuals to utilise up to the previous three tax years’ annual allowances, where earnings permit.  

Given the reduction to the additional rate income tax threshold, due from 6 April 2023, pension tax relief could be particularly useful for higher and additional rate taxpayers. This is because personal pension contributions have the effect of extending the basic rate band, meaning more income falls into the lower band, and less income falls into the higher and additional rate bands. If calculated correctly, pension contributions can even negate a higher or additional rate tax liability altogether. 

Making the most of market downturns

It might seem counterintuitive, but rather than looking to reduce pension contributions in times of stock market volatility, it should be worth considering increasing them.  

Whilst stock market downturns can be difficult to manage emotionally as an investor, markets do tend to recover in the long-term. So, as long as there is sufficient time to allow for a stock market recovery, those that are able to continue and/or boost contribution levels should find themselves in an advantageous position of buying units whilst prices are relatively low.

For further advice on any aspect of pension savings, or to discuss private pensions as part of an overall investment portfolio, please get in touch with us and speak to one of our Chartered Financial Planners.

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