Cost of living crisis: should I cut my pension contributions?

  •  By
  •  Murray Humphrey

Right now, it feels like barely a day goes by when there isn’t more news affecting our personal finances. Inflation rates, National insurance rises, the energy crisis - it’s easy to become anxious just trying to keep up.

One of the ways you may have considered cutting back is your pension. But should you cut back now? What will the impact be long-term? Here's how much you should be saving and what to do when times are tight.

How much should I save into my pension?

One of the most common questions we get the most at Penfold is a seemingly simple one: how much should I save? Of course, rather unhelpfully, the answer really is: it depends. There are, however, a couple of general rules of thumb we can use for guidance. They are:

  • Half your age rule
  • Two-thirds rule

Half your age rule

The half your age rule goes like this. Take the age you started paying into your pension and divide by 2. This number (as a percentage) is how much of your pre-tax salary you should into your pension every month.

For example, if you’re 30, you should aim to add 15% of your pre-tax salary into your pension every month. For someone earning £35,000, that would mean £300 a month.

For those in employment, this figure can be split between your contributions and your employers so if your employer is adding 3%, you’d only need to contribute 12%.

Two-thirds rule

This rule helps give you a rough guide of how much you’ll need in your pension pot when you reach retirement to support a comfortable lifestyle - giving you enough to enjoy a few luxuries like trips abroad.

Essentially, to maintain a quality of life similar to your current one, you should try to achieve a yearly income of 2/3rds your current income in retirement. Earn £35,000 a year? For retirement, you’ll want around £23,333 a year (before tax) in retirement.

Let’s say you’re aiming for a retirement of 20 years - that means you’ll need a pension pot of £23,333 x 20. A total pot of £466,660.

From there, depending on your age and current pension size, you can roughly work out how much you’ll need to save each month and year to reach that figure. Don’t forget to factor in investment returns, tax relief and the State pension!

Of course, while these methods are helpful guides, what it really comes down to is your personal financial situation. How much are you spending on rent or your mortgage? Do you have any debt? What are your short, medium and long term goals? It all boils down to what kind of retirement you’re looking for.

For more help deciding how much to save, you can use our free, handy pension calculator here. Next, we’ll look at what to do if you’re struggling to pay into your pension.

To maintain your current quality of life, aim for a yearly income of two thirds your current income in retirement.

Pension contributions on a budget

While it is absolutely crucial to start contributing to your pension as early as possible, the reality (particularly at the moment) is that you may need to focus on the here and now. If you’re struggling to pay your new high energy bills, or need to react to a financial emergency, what should you do about your pension? You have a few options.

1. Make irregular contributions

You don’t necessarily have to contribute the same amount into your pension every month - you can make irregular payments into your pot. If you find it works better for you, you can make a few larger contributions a few times a year, rather than paying in every month.

Many people prefer to make a large, one-off contribution into their pension just before the end of the tax year in April. Penfold savers, you can easily pause contributions and top up by heading to your payments from the dashboard in the Penfold app or website.

2. Reduce contributions

You can also temporarily reduce how much you’re paying into your pension. If you’re part of a workplace pension scheme, speak to your HR or pension representative and ask them to change how much you’re contributing.

Be wary though, legally you need to add at least 8% of your monthly earnings into a workplace pension scheme. For many companies, this means they add 3% while you make up the 5%. If you want to reduce your contributions below this legal minimum, you’ll be opting out of your scheme entirely. Of course, you can always increase your contributions again later when things are a little more comfortable.

With Penfold, you can tweak your contributions anytime. Simply sign in to your account and update your payment anytime, online or in our app.

It's crucial that you start contributing to your pension as early as possible to help your pot grow.

3. Combine your pots

If you’ve had a few jobs in your career, chances are you’ve left a few pension pots behind in your wake. As well as making it near impossible to get a complete picture of your financial future, having multiple pensions scattered around could mean you're paying over the odds or investing in a way you’re not comfortable with.

Penfold makes it easy to find and combine all your pots into one, award-winning plan.

How your pension can beat inflation

One of the main reasons many of us are feeling the pinch right now is the rising cost of living. You’ve no doubt heard about it in the news. Recently, inflation in the UK hit 10%. This means the price of everyday goods and services we pay for every month is getting more expensive.

If you’re lucky enough to have any disposable income left over for savings, one of the best ways to combat inflation is by investing. One of the best (and most tax-efficient) ways to do this is with your pension.

Thanks to tax relief from the government, as well as the power of compound interest, your contributions will have plenty of time to grow, setting you up for a happy, healthy retirement. Pensions are also a long-term investment, giving you plenty of time to ride out any market dips. If you can afford to, it’s a great way to make sure your hard-earned money retains its value (and even grows) long term.

You can contribute up to £60,000 (or 100% of your earnings, whichever is lower) into your pension each year and remember, each contribution comes with a 25% tax relief bonus - even more if you’re a higher earner.

Remember, with pensions, as with all investments, your capital is at risk.

A photo of Murray Humphrey

Murray Humphrey


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1. Get a Penfold account by registering your details online or with our app.

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