Pension savers considering temporarily opting out of their contributions during the cost-of-living crisis could be ensnared by “hidden traps” that will leave them considerably worse off, according to an independent consultancy.
According to scenario modelling by Broadstone, people on a £35,000 salary with a 5% matched scheme who reduce their contribution by the full 5% would lose their employer’s contribution, as well as tax-relief.
While their usual total monthly pension contribution will be £291.66, including employee and employer’s contributions and tax relief, if they opt out they will reduce their employee contributions by £145.83 a month. However, Broadstone warns that they will not see all that money added to their net pay, as the loss of tax relief means they would only add £116.66 to their monthly salary. Losing the employer’s contributions means their total monthly pension contribution falls to zero, causing a total loss of £175 to their overall wealth every month.
“For some people, taking the decision to reduce or stop their pension contributions will be necessary as income pressures intensify,” said Broadstone’s head of pensions and savings Rachel Meadows. “However, pension savers should be aware that there are traps and consequences due to considerable employer and government incentives around pension saving. It is not as simple as recouping the pension outgoings on their pay-slip pound-for-pound into their salary.”
The consultancy calls on employers to hold group sessions for their staff which outline the benefits of pensions, especially in the wider lens of personal finances, and to annually “nudge” savers who have reduced their contributions to restore payments back to at least recommended levels
Broadstone also urges employers to be pragmatic and ensure that their contributions are not reduced if staff need to bring down their pension savings levels to meet cost-of-living challenges.