Hear from money expert Emilie Bellet
As the cost-of-living crisis dominates our headlines, it’s clear that many of us are anxious about making ends meet. When money is tight, it’s much harder to save money and plan for the future. This means that you might have been looking at your outgoings and taking measures to free up cash to cover day-to-day costs.
If you’re struggling, taking a break from contributing to your pension might seem the only option. While this decision could help provide you with extra cash, it may have a long-term impact on the pension income you’ll get when you retire. Even if you are eligible for the State Pension, it might not be enough to provide for a comfortable retirement.
Any decision you make about your pension is important. When it comes to pensions, time is your best friend because the longer you contribute, the more pension income you’ll have when you retire.
A pension also works hard for your money, its tax efficient and in the case of your workplace pension with USS, you also get contributions from your employer.
If you’re wondering how taking a break from USS might affect you later in life, here are some examples*.
Omara’s a 26-year-old researcher
She’s been a USS member for two years and she earns £25,000. Her Retirement Income Builder (defined benefit) pension could be £33,439.13 a year with a tax-free lump sum of £100,317.39 when she retires. If she takes a break for four years, it could be £30,318.75 a year with a tax-free lump sum of £90,956.25.
Bob’s a 37-year-old lecturer
He’s been a USS member for 10 years and he earns £40,000. His Retirement Income Builder pension could be £39,754.52 a year with a tax-free lump sum of £119,263.56 when he retires. If he takes a break for a year, it could be £38,803.26 a year with a tax-free lump sum of £116,409.78.
Philomena’s a 52-year-old HR manager
She’s been a USS member for 27 years and she earns £50,000. Her Retirement Income Builder pension could be £36,625.60 a year with a tax-free lump sum of £109,876.80 and an Investment Builder (defined contribution) fund of £37,430 when she retires. If she takes a break for two years, her Retirement Income Builder pension could be £35,311.97 a year with a tax-free lump sum of £105,935.91 and an Investment Builder fund of £30,800.
Zac’s a 60-year-old professor
He’s been a USS member for 33 years and he earns £70,000. His Retirement Income Builder pension could be worth £42,168.21 a year with a tax-free lump sum of £126,504.63 and an Investment Builder fund of £39,270 when he retires. If he takes a break for three years, his Retirement Income Builder pension could be £40,550.97 a year with a tax-free lump sum of £121,652.91 and an Investment Builder fund of £18,670.
Before you make any financial decisions, think about your immediate and your longer-term priorities. Take a look at the Benefit Illustrator to get an idea of what your pension could be worth when you retire. It’s important to consider getting professional guidance and financial advice.
While there may be no easy answers to the situation at the moment, exploring other options to save money might help.
Unfortunately, there is no golden rule to cope with the current environment but we’ve tried to identify some areas that could save a little money — but understand this may not be possible for everyone.
Re-evaluate your needs and wants. With wants, you don’t have to go extreme to save money. For example, if you go on holiday every Christmas, perhaps this year you can opt for cheaper transport and accommodation. While needs are non-negotiable, the prices often are! Re-evaluate your internet, mobile, gas etc. deals and see if there are any ways to reduce a few pounds, although that’s going to be a challenge in the current market.
Look at your subscriptions. Does the money you pay toward x app justify the recurring price? Even if it only costs £3 per month, the subscriptions add up. Spend an afternoon going over these and cancel anything you don’t regularly use.
Consider the effect of inflation. The value of money sitting in a savings account may be eroded with time because of inflation. Other options include putting this money into your pension or a tax-efficient, or high interest long-term investment account is worth thinking about to make your money work harder.
Track your spending and review your bills. With direct debit, contactless and double-click payments being the norm these days, spending money has become an effortless exercise. It’s easy to lose track of how much you spend on a weekly basis. Using a spending tracking app is a great way to be reminded of how, and where, you’re spending money - and make adjustments accordingly. Make sure you also review and try to save on your household bills.
Emilie Bellet is the founder of Vestpod, author of You’re Not Broke, You’re Pre Rich and women & money columnist for i news. Emilie’s podcast The Wallet includes weekly money conversations.
*Examples assumptions
The illustrated examples have been based on the following:
We strongly recommend that you take financial advice before making any decisions in relation to your pension. You can access guidance support, or if you want advice, find a financial adviser through MoneyHelper, which brings three legacy consumer brands into one (Money Advice Service, The Pensions Advisory Service and Pension Wise). MoneyHelper is there to make your money and pension choices clearer. They offer impartial guidance that's backed by the government and free to use. You may be charged a fee for any advice you receive.
This article is not intended to constitute or provide you with financial advice. You should take any professional advice that you feel you need to understand the options available to you.