When you first start saving into a pension, retirement is likely to be decades away. As a result, it can be tempting to voluntarily take a break from paying into a pension or you may need to for factors outside of your control. But the impact can extend much further than you think and place retirement plans at risk.

There are numerous reasons why you may take a pension break. Young people hoping to get on the property ladder may divert pension contributions towards this goal, those with young families may decide to take a career break to raise children, or redundancy may mean you’re forced to take a pension break in the short term. Whilst the decision to halt pension contributions may be right for you in the short term, it can have a significant effect when you take a look at the bigger picture.

Understanding the impact of a pension break

Should you take a pension break, it’s important to understand the impact whether it was voluntary or not. It can help keep your retirement aspirations on track and highlight where other steps could help.

Whilst halting your own pension contributions may seem like they’ll have little impact in the long run, the amount that you pay in only makes up a portion of what you’d lose. Employee pension contributions benefit from tax relief, at either 20%, 40% or 45%, depending on the level of Income Tax paid. In addition, employers must contribute to your pension if you are. However, employers are not obliged to add to your pension if you halt contributions.

On top of this, pensions are typically invested. As you can’t access the returns until you reach retirement age, these go on to deliver returns too. This effect, known as compounding, can help pensions grow at a faster pace over the long term. The longer your money is invested, the greater the impact. As a result, a pension break can mean the effect of compounding is lessened.

So, whilst a pension break may mean you keep more of your paycheque, you’d actually be losing far more.

Of course, whilst pension breaks may be your decision, sometimes they’re the result of factors outside of your control. Research from financial technology firm Dustan Thomas highlighted the impact a redundancy can have on pension savings, for example. It’s something that affects many workers, two in five middle-aged individuals have been made redundant at least once. Some 4% had faced redundancy four or more times over their careers.

The research found:

  • People age 39-54 who have suffered compulsory redundancy have average pension savings of £120,634. This is some 40% less than those who avoid being laid off who have £202,017
  • Those affected by voluntary redundancy faired better, with an average pension of £138,834 compared to £178,328 for those who hadn’t experienced it

If you take a pension break, it’s important that you keep an eye on your savings. Just because you’re no longer making contributions doesn’t mean you should disengage with pensions. Keeping on top of pensions and retirement plans can help you minimise the impact of a pension break and identify when you may need to take action to close the gap.

How can you close the gap left by a pension break?

If you find that a pension break will leave your savings short at the point of retirement, don’t panic. There are still steps you can take to close the gap.

Increase pension contributions: One of the simplest steps to take is to increase your pension contributions once you start adding to your pension again. Depending on how far away retirement is, even a moderate increase can have a big impact on the income you can expect to receive in retirement. Financial planning can help you understand how these contributions can add up over the rest of your working career.

Add a one-off lump sum: If you have the assets to do so, you can add a lump sum to your pension too. This can help make up for the lost contributions during your pension break and get you back on track straight away. One thing to consider here is the pros and cons of drip-feeding contributions compared to a lump sum. One key factor influencing this will be how long your money will remain invested for. Adding a lump sum just before a downturn can have a significant impact on savings if you’re retiring relatively soon.

Invest with the long term in mind: As pensions are invested, returns can help you close the gap. Amid market volatility and downturns, you may be concerned about investing more. However, it can also present an opportunity to invest when the price of stocks and shares are lower, potentially leading to higher returns. Likewise, don’t just invest in the default fund option. Review the choices and select the one that is most appropriate for your risk profile and goals.

Work for longer: In the past, there was a traditional retirement age, but more people are choosing to work for longer for a variety of reasons. Extending your working life can allow you to continue paying into a pension to make up previous shortfalls.

Use other assets to support retirement: When we think of retirement planning, it’s often pensions that are the sole focus. But your other assets can play an important role. If you find you’re facing a shortfall due to a pension, it’s worth reviewing how your savings, investments and even property could be used to support your retirement lifestyle.

Please contact us if you’re worried about how a pension break could affect your retirement. There are often steps you can take to ensure your retirement dreams stay on track, we’re here to help find solutions that match your plans.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations which are subject to change in the future.