Investors warned of ‘damaging’ pauses to pension contributions

Even a short-term break means a big blow to retirement pots, Aegon says.

Investors are being warned of the “damaging long-term impact” of pausing pension contributions amid the pandemic.

Stopping pension contributions may be tempting if the coronavirus outbreak has hit your income.

But provider Aegon warns this short-term cash boost will be detrimental to your retirement income once you reach state pension age.

For example, a 25-year-old employee on average wages pays 6% in personal contributions and receives 4% from their employer into their pension, making a total contribution of 10%.

Stopping contributions to their pension entirely but starting up again after three years at the previous contribution level could mean losing out on £15,500 at state pension age, Aegon says.

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Rather than ‘pause’ pension contributions for a period, if this individual decides to reduce personal contributions by just 1% until state pension age, this could mean losing out on £18,400.

The 1% decrease is equivalent to an initial reduction in monthly pension contributions of £14 from take home pay, Aegon warns.

Steven Cameron, pensions director at Aegon, says: “For many, the coronavirus pandemic has placed an extreme strain on finances and individuals may look to areas that can ease the pressure.

“However, those looking to cut back on their pension savings levels should carefully consider the long-term effects on their retirement pot before making any decisions.”

He adds that while there may be a short-term boost to take-home pay by stopping contributions, it means savers miss out on the benefit of compound returns in the early years of investment.

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Rebecca O'Connor, head of pensions and savings at interactive investor, says she would strongly recommend savers don’t cut their pension payments.

She adds: “The chance of resuming them again is minimal, realistically, unless income recovers quickly. People tend to get used to lower pension payments, and adjust spending accordingly.

“Equally, if you are genuinely unable to meet living costs now, then it could make sense.

“There’s no point losing your home for the sake of your pension in 30 years’ time. But you must keep your ability to resume payments under constant review.”