October 5, 2022
With the cost of living rising to its highest rate for over 30 years, it’s no surprise that people will be looking at ways to reduce their monthly outgoings and making their pay cheques go further.
People might now be asking themselves if they can still afford to save for old age and make payments into their pension pot. The answer is you really should try to keep paying into your pension, because there are a number of benefits to keeping up with savings plans and choosing to cut down on other luxuries while times are hard.
On the plus side The Office for Budget Responsibility expects inflation will begin to decrease in 2023 and historically there is usually a stock market recovery after a fall, which will benefit your longer term investments such as your pension.
Try to spend 50% of your income on your essential household bills such as rent, mortgage, utilities. Budget for 30% of your income to be spent on things you want to do such as going out, buying new clothes, and going on holiday. Put the remaining 20% aside for savings and pension contributions. Make sure you always make these 20% payments first for your future self and if you need extra money each month, use the 30% ‘treat’ pot wisely.
If you can avoid having to pause your pension payments you will be grateful in the longer term as you will have more money in your pot when you retire. If you are enrolled in a workplace pension and choose to pause payments or leave the scheme, you will also lose out on the 25% tax top up on your contribution plus the contribution your employer makes which is typically 3% of your gross salary.
If you are aged over 55 it is recommended you don’t dip into your pension pot to help get you through the current cost of living crisis. Currently over 55’s can take 25% of their pension pot as a tax-free lump sum. This may however leave you short of funds as there will be less money to grow in the period building up to your retirement and you might need to make extra payments in the future to get you to a figure sufficient enough to allow you to retire. Taking a lump sum could also push your annual income into a higher tax bracket as if you are still working, the lump sum and your income count towards your tax allowance.
Clearly there is a lot to think about when living now and planning for your future, and if you need some advice to get your pensions and savings back on track, get in touch with us today
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