Why you should think twice before pulling the plug on your workplace pension

After two and a half years of financial uncertainty, Emma Preston is understandably feeling anxious. 

The 38-year-old hotel manager was furloughed during the first lockdown. And since returning to work, she’s struggled to cope with the soaring cost of living.

These unprecedented pressures have forced her to resort to something she never dreamt she’d do: pull out of her workplace pension.

‘I am preparing for the worst. I need all the extra money I can get so I can access it quickly if there’s an emergency,’ says Emma, from Durham.

While it may sound radical, she’s just one of a growing group of workers pulling the plug on their retirement savings. 

The number of people opting out of their company pension scheme increased by 29 per cent between March and July this year, according to research from digital pensions platform Penfold.

And a survey by wealth management firm Charles Stanley found a quarter of employees had either already withdrawn from their workplace pension or were considering doing so due to rising prices.

It is easy to see why. Earlier this month, the Bank of England hiked its base rate from 1.25 per cent to 1.75 per cent — the biggest single jump in 27 years. This is bad news for borrowers, who now face spiralling mortgage, credit cards and loan costs.

Meanwhile, energy bills are predicted to soar as high as £4,427 next April. And the cost of just about everything else is rising, too.

It’s led to what’s being coined as ‘the Great British Cutback’, as figures from the Office for National Statistics show 57 per cent of households are spending less on non-essentials.

But experts are alarmed workers are also scaling back pension contributions — not least because so many are already failing to pay in enough for a comfortable retirement. Withdrawing altogether could leave them even further behind and unable to catch up.

Lisa Caplan, a financial planning director at Charles Stanley, says: ‘This kind of short-term thinking really adds up over the years and leaves people vulnerable to a less secure financial future.

‘Understandably, people are looking at ways to meet their living costs, but they are making decisions that will impact their long-term financial position.’

Analysis by investment platform AJ Bell shows that if a 30-year-old earning £30,000 pulled out of their workplace pension for three years they would miss out on £5,847 worth of contributions.

This assumes the individual is auto-enrolled into a scheme with employees paying in 5 per cent of their pay packet and their employer contributing 3 per cent. It also factors in a 2 per cent a year pay rise.

But the real damage is done later, as savers will miss out on vital compound interest. By the time they retire aged 68, their pension pot would be £24,954 smaller than those who kept up their payments. 

This assumes they had £50,000 in their pot to start with and annual investment growth at 4 per cent.

Tom Selby, head of retirement policy at AJ Bell, says: ‘If you opt out of your workplace pension scheme, you are essentially giving up your matched employer contribution — effectively a voluntary pay cut.

‘Furthermore, you will miss out on the upfront boost provided by pension tax relief — 20 per cent for basic-rate payers and 40 per cent for higher-earners. Over the long term you’ll need to think about how you plug the gap.’

But this is still not enough to convince Emma, who says a pension pot has become a luxury she cannot afford. 

She lives with her 71-year-old mother Edith, who receives the state pension, and together they are desperately trying to save money for this winter.

Emma says: ‘We’re trying to cut down on everything. And I have around £500 in savings now which can cover any big bills.’

Experts are also concerned a lack of financial literacy is exacerbating the issue. Many people do not understand the benefits of a workplace pension, according to Charles Stanley’s survey.

Miss Caplan says: ‘Often people feel pension money is not ‘really theirs’ and they will never be able to access it. This isn’t true.’

Meanwhile, Andrew Tully, technical director at Canada Life, recommends that anybody looking to pull out of their workplace pension should speak to their employer first.

He says: ‘You should ask whether they might consider continuing their contributions to your pension — even if you stop yours. It is always worth asking the question.’

However this advice is of little help to freelance workers such as Natalie Ormond.

As a social worker for 14 years, Natalie was auto-enrolled into a generous public sector scheme, which gave her peace of mind that she was building a future nest egg.

But now, a year after quitting her job and starting up a business, Natalie’s pension has become a growing anxiety.

‘I haven’t paid anything into it for nearly 12 months. A financial advisor warned me to keep up my contributions, but money is so tight it’s slipped off my radar,’ says Natalie, 40, a mother-of-two from Leeds.

Historically, freelancers have been more reluctant to pay into their pensions. A study by the Financial Conduct Authority found that 55 per cent of self‑employed workers did not have a pension in accumulation in 2020.

This is often because the onus is on them to set up their own private scheme and they do not receive a boost from their employers.

For Mr Selby, of AJ Bell, the key is in efficient planning. He says: ‘If you really can’t afford to save for retirement today — and have combed through your weekly spending for alternative ways to save — then make sure you keep revisiting your budget regularly. 

The earlier you get back into the savings habit, the easier it will be.’

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