‘Turning down free money’: Basic pension error saves £40 but you lose staggering £933 | Personal Finance | Finance

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As the cost of living crisis worsens, millions of workers are questioning whether they can afford to continue saving into a pension. There’s a good reason why they should press on.

Free money is a rarity in this life, but that’s exactly what you get when you save into a pension.

Tens of millions of workers who pay into a company scheme get a matching contribution from their employer.

Typically, this is equivalent to three percent of their salary, but can be a lot higher in more generous workplace pension schemes.

You will not get that money if you stop paying into a company pension, so anyone who does that is effectively turning down free cash.

That is not the only way pension savers lose.

Pension contributions also attract tax relief as an incentive from the government to save. So a basic rate taxpayer who pays £80 into a pension gets that topped up to £100.

A higher rate 40 percent taxpayer only pays £60 for each £100 that goes into their pension.

Remember, this is on top of any employer contribution.

Workers who stop paying into a company pension may save a bit of money today but in return miss out on this double cash booster, warns former Pensions Minister and campaigner Ros Altmann.

This is a real worry as one in five workers is considering stopping pension contributions as they look for ways to cut their monthly spending, according to the Pensions Management Institute.

Workers who cut their pension contributions will harm their retirement prospects while doing surprisingly little to boost their spending power, Altmann says.

They will lose far more money than they gain but many do not realise the danger, because they do not understand how pension contributions work. 

“If you pay £40 into a pension, that can immediately become £100 or more in your pot once employer contributions and tax relief are added,” Altmann says.

An employee who stops paying into a scheme may save themselves £40 today, but at a much greater cost.

In a further blow, they will lose all future growth on that contribution, which is tax free.

If a 35-year-old invested £100 in a pension today and the pot grew at an average rate of seven percent a year, it would be worth £933 by the time they came to retire at age 68.

By saving £40 they have lost more than 23 times as much money.

The lost would be lower for someone who is closer to retirement as their money has less time to compound in value, but it would be even higher for younger savers.

READ MORE: State pension to rise by double inflation but older people get less

The self-employed do not get an employer contribution, so the loss is not quite as great. But they still get tax relief on any money they pay in themselves, which they will sacrifice if they stop paying in.

Lower income workers who claim means-tested benefit universal credit will also lose if they opt out of a company pension, Altmann warns.

The Department for Work and Pensions ignores pension contributions when calculating net earnings and will cut benefits payments if people no longer pay into a scheme. 

So, paying £100 a month into a pension scheme will reduce the income used in the universal credit calculation by the full £100, Altmann says. 

“If their income is lower, they receive extra benefits. Stopping pension contributions of £100 will mean £55 less in Universal Credit. 

Carla Morris, financial planner at wealth manager RBC Brewin Dolphin, said some may struggle to keep paying into a pension as they battle to meet essential bills. “Rather than stopping contributions completely, it would be best to reduce payments for a period of time, then catch up later.”

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