Ask Jenny Ross: Should I cut my pension contribution as the struggle with the cost of living?​​​​​​​

Question: I am currently putting in eight per cent into my pension with my employer putting in three per cent. However, with the rising cost of living, I am considering reducing my contribution. How much should I reasonably be putting into my pension and if I cut it, how much by?

Even reducing contributions by a small amount could have a significant impact on your retirement income
Even reducing contributions by a small amount could have a significant impact on your retirement income

Answer: With household budgets under huge pressure, many of us will be trying to make cutbacks wherever we can. But while saving for the future might not seem a priority at the moment, cutting your pension contributions could store up more financial challenges for a later date.

When you pay money into a pension you benefit from tax relief, which boosts a £100 contribution to £125 for basic-rate taxpayers. This money is invested by your pension scheme. Thanks to tax relief and investment growth, any contributions you make today are likely to be worth much more by the time you retire.

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Even reducing contributions by a small amount could have a significant impact on your retirement income. The insurer Aegon estimates that if a 25-year-old employee on average earnings were to reduce pension contributions by just one per cent of earnings until state pension age, it could mean losing out on £18,400. What’s more, if that one per cent reduction were to be matched by the employer, the amount the employee would lose out on at state pension age doubles to £36,800.

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Under auto-enrolment rules, the minimum total contribution for a workplace pension scheme is eight per cent of your ‘qualifying earnings’ – made up of five per cent from you (including tax relief) and three per cent from your employer.

Unfortunately even this isn’t guaranteed to deliver a decent enough income in retirement. As illustrations from AJ Bell show, a 30-year-old earning £30,000 a year could end up with a fund worth around £306,000 at 68 (state pension age) if they contribute eight per cent of their salary into a pension each year. This would only give them a drawdown income of around £10,000 a year until their mid-90s, after they’ve taken their 25 per cent tax-free lump sum.

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This falls short of the £13,000 that Which? research suggests is enough to cover essentials (including food and drink, mortgage or rental payments, transport, utility bills and insurance). The combined figure for couples is £18,000.

To achieve a ‘comfortable retirement’, which includes the essentials plus regular short-haul holidays, other leisure spending and charity donations, the average income a two-person household would need is £26,000. Single-person households would require closer to £19,000.

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If you do decide to reduce your workplace pension contributions you’ll first need to check whether this is an option with your employer and your pension provider. In cases where this would involve paying less than the minimum, it’s not just the employee’s contributions that would go down – but possibly the employer’s too. In theory, they could stop paying altogether because they’d no longer be bound by auto-enrolment rules.

As you’re currently paying more than the minimum, reducing your contributions doesn’t need to involve forfeiting those from your employer, but do ask yourself whether the money you’ll be freeing up is really worth the long-term hit to your pension pot. You can choose to increase your contributions again at any point – just let your employer know in writing.

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To get a better idea of how much your pension pot might be worth at retirement, and how much income this could give you, use Which?’s free pension calculator at

Jenny Ross is editor of Which? Money



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