Pay for today or save for tomorrow?
Financially, the last year or so has been tough for a lot of us. For a host of reasons, we’ve seen inflation rise steeply, which has affected the prices we pay for the food we eat and the energy we heat our homes with. Because of this, many of us will be making some difficult choices about how we spend our money this year too.
Is cutting back on your pension a good idea?
When you’re faced with higher costs for essential everyday items, paying for what you need today and cutting back on – or even stopping – what you’re saving into your pension, might seem tempting.
But stopping or reducing the contributions you make should really be a last resort. Before you decide, make sure you consider the following first.
1 Your income in retirement
Pausing your contributions, even for a short time, could make a noticeable difference to the income you’ll have available when you retire. You can read more under 'The cost of stopping or reducing your contributions'.
2 Tax and National Insurance relief
Paying money into a pension is one of the most tax-efficient ways to save for your future. This is because your contributions are taken from your salary before income tax is deducted. If you pay tax at the basic rate, this means that you’re only actually paying £80 for every £100 you pay into your pension.
If you make your contributions through salary sacrifice, you’ll also make National Insurance (NI) savings. When you pay into the Fund through salary sacrifice, your salary is reduced by the amount you want to contribute, which Nestlé then pays into the Fund for you. Because your salary is now lower, you pay less tax and NI, and your take-home pay goes up.
If you stop making contributions, you’ll no longer be able to benefit from these forms of tax relief.
3 Other benefits of Fund membership
Your Fund membership comes with other benefits alongside helping you to save for your retirement. If you opt out, not only would you miss out on ‘free money’ from Nestlé, but you’d also lose valuable death-in-service or life assurance benefits, which can be costly to replace.
If you’re a member of DB Core or DB CorePlus, your loved ones could also be entitled to a dependant’s or children’s pension after you die. These would be reduced if you paused or stopped your contributions.
As a member of the Fund, you may also be eligible for ill-health cover if you become too ill to carry on working. The level of cover you might receive depends on which section of the Fund you’re in.
4 Investment growth fuelling more growth
If you’re a member of DC Core or DC Start, or you’re over the pensionable earnings cap or making additional voluntary contributions (AVCs) in DB Core or DB CorePlus, your DC savings are invested with the aim of growth.
Any money you make from this growth is then reinvested along with any new contributions or AVCs you make. This is called compound growth. Reducing or stopping your contributions could slow any compound growth you might benefit from.
Remember that growth isn’t guaranteed and the value of your investments can go down as well as up.
5 ‘Giving up’ extra cash
And finally, if you stop or reduce your pension contributions, you could get used to or become reliant on using that money to cover your outgoings. Giving that money up to start or increase your contributions again could feel more difficult than reducing your bills now if you’re able to.
The cost of stopping or reducing your contributions
Earlier in this article, we talked about the savings you can make when you save into your pension through tax relief and salary sacrifice. You can see some examples of this in the How your pension builds up section.
But you can also see how making changes to how much you contribute would affect you personally by using the modeller. It’s already populated with your own figures (your age, salary, target retirement age, and the contributions you and Nestlé make), which you can adjust. The modeller then calculates the effect that stopping or reducing your contributions could have on your income in retirement and on the tax and NI savings you’re currently benefiting from.
Take a look for yourself by logging in to your online account and selecting ‘Use the modeller’ from your dashboard.
Don’t have an online account yet? Register online today. You’ll need your email address, date of birth and member number. You can find your member number on your annual pension statement or joining pack.
Thinking of opting out?
Remember, if you’re a member of DB Core or DB CorePlus and you decide to stop making contributions, you’ll effectively be opting out of the DB section of the Fund.
If you want to start making contributions again, you wouldn’t be able to rejoin DB Core or DB CorePlus – you’d become a member of DC Core instead.
Managing your finances in uncertain times
Don’t forget that, through Nestlé, you have free access to nudge – a financial wellbeing platform that aims to help you keep in control of your money. Use nudge’s financial health check-up tool to pinpoint the areas you could focus on to improve your financial health. You can also access articles and stories about how to deal with the cost of living, as well as a budgeting tool and information about how to manage debt.
Go to nudge.
If you’re worried about how to keep on top of rising financial demands, or you’re already struggling, you can also access free and impartial guidance from trained staff at MoneyHelper. The MoneyHelper contact page lists all the ways you can get in touch, including live webchat, WhatsApp, social media, phone or webform.
It’s also worth looking at MoneyHelper’s cost-of-living guides and toolkits for information about how to live on a squeezed income and prioritise any debt you might have. The toolkit also includes a cost-of-living calculator and budget planner.
Help for Households
The government has recently launched its Help for Households website. It contains useful information about what support you can access to help with the cost of living, including making sure you’re getting all the payments you’re eligible for. You can also find tips on how to save energy and reduce your household costs.
Find out more at Help for Households.
A quick word about scams
Your pension is probably one of the most valuable assets you have, which is why it’s so important to keep it safe. During the cost-of-living crisis, scammers have been targeting people as they try and free-up cash from their pensions to help pay their bills.
Find out more about how to keep your pension safe in our pension scams article.