Should savers continue contributing to a workplace pension?

“A little goes a long way”, as Charles Dickens once said.

Indeed, this quote resonates with many elements of our day-to-day lives, particularly when it comes to retirement finances. After all, even the smallest contribution to one’s pension pot now can make a big difference in later life.

This has particularly been the case since 1st October 2012, when the government introduced auto-enrolment for workplace pension schemes. All eligible employees – those earning over £6,240 a year – working within a business with one or more members of staff were automatically enrolled into their workplace pension. Every month, a small portion of their salary was placed into their pension pot, thereby contributing to their future retirement income. 

However, contributing to a workplace pension can be frustrating – after all, it may be disheartening for some to part with a percentage of their income without seeing any immediate reward for doing so. However, opting out of a workplace pension scheme could cause adults to miss out on certain benefits.

The benefits of a workplace pension

Saving into a workplace pension essentially entitles adults to “free money”. This is because all employers also contribute to each employee’s pension pot.

At present, employers are compelled to pay a minimum of 3% into an employee’s pension pot, whilst the employee in question must pay a minimum of 5%. This may not sound like much at first, however these contributions will gradually accumulate over time – so by the end of a person’s working life, their pension pot may have grown to a healthy size.

What’s more, workplace pensions are reasonably flexible, so an employee can choose to increase their contributions at any time. Indeed, My Pension Expert’s recent survey found that almost a fifth (19%) of UK adults aged 40 and over have chosen to up their contributions within the past year. In some companies, the employer agrees to match increases to pension contributions, so it’s certainly worth considering.

On top of this, the government tops up employee pension contributions further with pension tax relief. Pension tax relief is paid in accordance with a saver’s tax bracket and can be a welcome addition to any pension pot, providing further motivation to continue pension contributions.

Naturally, dedication to such saving will greatly benefit people as they approach retirement age. The more they save earlier in their life, the more opportunity the pension may have to grow comfortably over the years.

Points to consider

Of course, it is important to acknowledge that for some, making regular pension contributions may be challenging. After all, the financial pressures caused by COVID-19 have forced some to focus on more immediate financial goals, such as mortgage repayments or paying utility bills, rather than retirement. Indeed, My Pension Expert’s aforementioned research revealed that 7% of people were forced to reduce their pension contributions over the previous twelve months. 

Whilst understandable, it is more beneficial for adults to avoid pausing their pension contributions, if possible. Indeed, doing so will inevitably result in a smaller pension pot by the time individuals reach retirement age – and this realisation could cause panic.

Instead, savers should consult an independent financial adviser before making any major decision about their retirement finances. Advisers review all elements of a person’s retirement strategy and make appropriate recommendations to help people save more effectively – meaning that savers should be able to proceed with their retirement strategy without hindering their current financial situation. 

Workplace pension schemes are an incredibly useful tool to prompt people to start saving as early as possible for their retirement – and they will undoubtedly continue to play a prominent role in many people’s retirement strategies. However, those who are worried about the immediate financial consequences of their pension contributions would be wise to seek financial advice. Doing so will be a positive step in sustaining their present and future financial health.