In the cost of living crisis, should I opt out of my pension?

Two hands hold coins with a plant growing out of them

Prices are rocketing. Inflation has hit 10% and we’re all feeling the squeeze. Right now, saving for your future self may feel like leaving your current self short of money. Money you need to spend on things like food and fuel.

But did you know, opting out of your auto enrolment pension scheme means you miss out on extra money?

What you get for being auto enrolled

Your employer puts you into a pension. You pay in some of your salary – and your employer adds more.

That’s extra money you wouldn’t get if you weren’t in the pension.

It gets better. The government also gives you extra money called tax relief. Here’s how it works.

  • You don’t pay income tax on money going into your pension savings.
  • Instead, the tax you would have paid on that part of your salary goes into your pension.

In other words, you can save towards your future self without doing anything. And it’s not just you. Your employer and the government are saving for your future too.

55 or over? Find out how you can take your pension benefits and where to get free advice.

Lukas’s story

  • Lukas earns around £16,000 a year
  • He pays £40 a month into his pension savings
  • His employer puts in another £24
  • And on top of that, he gets £8 in tax relief from the government

‘There’s £72 a month going into my pension, but I’m only paying £40 of it,’ says Lukas. ‘That’s amazing!’

It keeps on building up

You can’t touch pension money until you’re 55. That’s the law – it’s not a rule we’ve made up. So, if you’re under 55, you can’t dip into your pension savings now to help with the cost of living increase.

But if you look at it another way, it means your pension money has a safe place to build up. And there’s a secret ingredient that helps your money grow even more – compounding. It works like this.

  • You and your employer pay into your pension.
  • The government adds tax relief.
  • Your pension is invested with the aim of getting it to grow.
  • And it goes on repeating. You and your employer pay more into your pension. The government adds more tax relief. This means there’s more to grow, so over time you get new growth on any profit on your existing pot, as well as any new money paid in.

The bottom line: the longer you save the more your money builds up.

Don’t forget, if you’re not saving into an automatic enrolment pension scheme at the moment, ask your employer if you can opt in. You can also transfer other pensions into the NOW: Pensions Scheme which could make managing your pension easier and help you save on administration charges.

The stop gap

Before you take any action to opt out remember you’ll lose the extra money from your employer and the government, as well as your own contributions to your future self. This could make your future pension savings smaller.

But you’re probably asking yourself can opting out of your pension for a couple of years really make that much difference?

Priya’s story

  • Priya earns around £35,000 a year
  • She pays 5% of her salary into her pension savings
  • Her employer adds another 5%

If Priya opts out for two years, she could have as much as £25,000 less in her pension savings when she wants to retire.

‘I had no idea opting out of my pension could make such a big hole in it,’ Priya says. ‘I’m thinking twice about it now!’

With the cost of living crisis, we realise stopping pension payments may be a better option for some people than going without other things. But if you do opt out, think about when you can opt back in and do it as soon as possible. It’s easy – just opt in at nowgateway.com or ask your employer to put you back in.