Making regular contributions to your pension is a crucial way to save for a happy retirement. However, life can be unpredictable, and there may be times when you find yourself unable to maintain a consistent level of contributions. If you’ve stopped your pension payments and are looking to catch up, don’t panic – it’s never too late to get back on track. Here are a few things you can do.
Assess your financial situation
You might have lowered, or stopped your pension contributions altogether, for a couple of reasons. Maybe you’ve taken some time out of work, have been juggling other rising costs or, prioritising paying off debt. So take some time to go through your finances and understand all of your incomings and outgoings. Firstly this will enable you to prioritise your regular payments such as housing, travel and food. And secondly, it’ll help you identify where you might be able to cut back in order to resume your pension contributions.
Increase your contributions
If you’re able to, you might want to consider increasing your pension contributions gradually to get back on track. If you’re employed, you might be able to increase the percentage of your salary you contribute each month. Since Auto-Enrolment was introduced in 2018, the minimum employee contribution is 5% of qualifying earnings with employers needing to contribute a minimum of 3%. However, your employer might agree to pay more into your pension if you increase your contributions. This is known as ‘contribution matching’. Check your employee handbook or speak to your company’s HR department to find out more.
Consider a lump sum payment
If you’re returning to work after some time off, or have recently come into some money, you might want to consider making a lump sum payment to make up for missed contributions. If you’re closer to your desired retirement age, or are planning on retiring early, paying in a lump sum is a great way to give your savings a boost. You can use our Pension Calculator to check your pension forecast and discover if you’re on track to meet your goals.
Use carry forward and make the most of pension tax relief
In the current tax year you can contribute up to £60,000 to your pension. If you use up all of your annual allowance in one year, it’s possible to contribute more to your pension with unused allowances from the previous three tax years and still receive tax relief. Claiming tax relief on pension contributions for previous years is relatively straightforward as long as you were a member of a pension during that time. Before you get started, make sure you’re clear on the carry forward rules.
Four ways to catch up on pension payments
Using our Pension Calculator, we’ve done some modelling to showcase how the average person might make up for five years of missed pension payments. These calculations are based on a 40-year-old with an annual salary of £40,000 and a current pension pot of £30,000.
The following scenarios are for illustrative purposes only and assume: - pension experiences investment growth of 5%, inflation of 2.5%, and an annual plan fee of 0.70%; - salary experiences annual growth of 3.1% and inflation of 2.5%; and - contributions to their workplace pension (when making them) are 8% of their gross salary.
Some employers may enrol you in a defined benefit pension scheme, or not enrol you at all. If you’re unsure which type of pension you have, you can always ask your employer for more information. Learn about the eligibility criteria for Auto-Enrolment.
1. Scenario one
This scenario assumes you re-enrol into your company’s pension scheme from Year 6, after opting out for five years. The below graph shows the difference between:
- remaining opted out;
- opting back in from Year 6; and
- what your pension would look like if you’d remained opted in.
2. Scenario two
This scenario assumes you re-enrol into your company’s pension scheme from Year 6, after opting out for five years. And you make a lump sum payment of £2,400 (before tax relief) that same year. The below graph shows the difference between:
- remaining opted out;
- opting back in from Year 6 and making a lump sum; and
- what your pension would look like if you’d remained opted in.
3. Scenario three
This scenario assumes you re-enrol into your company’s pension scheme from Year 6, after opting out for five years. And you start making additional personal contributions of £200 (before tax relief) per month from Year 6. The below graph shows the difference between:
- remaining opted out;
- opting back in from Year 6 and making additional personal contributions; and
- what your pension would look like if you’d remained opted in.
4. Scenario four
This scenario assumes you re-enrol into your company’s pension scheme from Year 6, after opting out for five years. Plus you make a lump sum payment of £2,400 (before tax relief) in Year 6 and you start making additional personal contributions of £200 (before tax relief) per month from Year 6. The below graph shows the difference between:
- remaining opted out;
- back in, making a lump sum payment and making additional personal contributions; and
- what your pension would look like if you’d remained opted in.
Risk warning As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
