More young workers are pausing pension contributions – this is how much it’s costing them

A lot of us don’t want to think about it.

Getting old, retirement, pensions. It’s a lifetime away. And with rising bills and rent restricting finances right now, it seems planning for 40 or 50 years down the line is even further from the minds of young Britons.

In the past year alone, the number of financially vulnerable 30-somethings who are failing to set aside money for their retirement has increased by more than 5%, or 72,000, according to data science firm Outra.

The total stands at 1.43 million.

One of these younger workers pausing contributions is Neha Solanki, 24, who works as an accounts assistant for a PR firm in London. She found opting out of her pension for a while meant her grocery bill – £60 a month – was covered.

“Even the smallest amount makes a difference, which is why I decided to opt out last September,” she says.

“It would have been nice to have a pension investment but because of the cost of living I think it is very difficult to do that.

“I end up spending about £100 a month on travel. When you add up rent and everything else, it builds up.

“When I was trying to opt out I was advised not to but when you add up the smaller payments it makes a difference.”

‘Last thing I would stop doing’

Peter Jackson, formerly chief data officer at the Pensions Regulator and now in the same role at Outra, says he understands the pressures young people are under but warned against opting out of a pension scheme.

“If you flip out of your pension you are pushing a cost of living crisis into your retirement. You are not going to have a sizeable pension pot available to you when you come to retire,” he says.

“It’s harder to build that pot when you are 55 or 60 because you have only got a few years left.

“Personally, that would be the last thing I would stop doing.”

How much could you lose?

Pausing pension contributions even for a short time can have consequences, the life assurance and pensions company Standard Life has found.

Its analysis suggests a person who began working on a salary of £25,000 a year in 2020 and paid the standard monthly auto-enrolment contributions (5% employee and 3% employer monthly contributions) from the age of 22 could amass a total retirement pot of £459,000.

Opting out for three years would knock off £36,000 from your retirement pot – and six years £71,000.

Missing out on free money

And crucially, Mr Jackson adds…

“With a lot of employers, if you increase your contributions a lot of them will match it up to a certain percentage so it is kind of like free money.”

Clare Moffat, pensions and legal expert at Royal London, says pausing pension contributions “might be something people have to do” as bills rise but they should take any pay rise as an opportunity to opt back in.

“A lot of younger people think they are not going to get any state pension or they are not going to see state pension until they are about 70 but then they still want to retire when they are about 60,” she says.

“It’s up to employers to help a bit as well. Remind people when they get a pay rise that this might be a good time if staff have opted out to opt back in.”

When it came to knowing how much to contribute, she says, “it’s better to think how much money you would need in retirement” – and there are tonnes of free online retirement calculators.

She adds: “I’ve never heard someone say I wish I had saved less for retirement – most people wish they had saved more.

“Sometimes, people can be put off and think they need to be saving hundreds of pounds a month but if you’re in your 20s, little increases are good.”

Read more from the Money team:
Earlier pensions for some and no more triple lock, expert says
Price rises, pension uplift, new eBay fee – key money dates in April

Money locked away is a good thing

Why not look at saving for a pension differently, suggests Claire Trott, divisional director for retirement and holistic planning at the financial advice firm St James’s Place.

“People see it as money being tied up for decades, but actually that’s a real winner,” she says.

“We all know we can dip into things we shouldn’t but with pensions you can’t. They are there, they get their tax relief, they get the growth, they sit there and year on year you will see some change.

“Obviously, we know that markets fluctuate so it may not always look that rosy, but the longer it can stay in there the better.

“Getting it in there in your 30s or ideally in your first job just means you get that compound growth on it over the long-term.”

She concludes: “With pensions, because it’s locked away and you are making that good decision, it means you are doing your future self a real service because you can’t touch it and it is there to be invested appropriately.”