Saving up trouble if you stop investing towards retirement

With many households dealing with salary cuts and recent market volatility, some may be wondering whether pension saving is worth it at all, as they focus on making ends meet in the here and now.

The markets have taken an enormous hit, but even defined contribution schemes should recover in the long term. Photograph: iStock/PA

Although budgets are under strain at the moment, it’s important to remember you’re playing the long game with pension saving.

If you’re not approaching retirement, this means you’re building a nest egg for a time when, hopefully, the current disruption will have passed.

Julian Mund, chief executive of the Pensions and Lifetime Savings Association (PLSA), says: “In the majority of cases, the best action is to stay the course with your workplace pension. Past experience suggest that share and other asset prices will recover over time.”

PLSA has produced a pensions guide which you can find online (https://bit.ly/2zZv7ri) along with the following advice.

Defined benefit (DB) pensions, such as final salary schemes

A DB pension scheme bases payouts on how many years you have worked for your employer, the salary you’ve earned and the age you retire. More than 28 million people in the UK have this type of pension.

The retirement benefits for people with this type of pension are not directly affected by stock market movements – whether the volatility is due to coronavirus or something else. Employers are responsible for making sure there’s enough money when you retire to pay your pension income.

The Pension Protection Fund has a duty to protect people with a DB pension in cases where an employer becomes insolvent.

Defined contribution (DC) workplace pensions

Meanwhile, around 17.5 million people have a defined contribution (DC) workplace pension. With this type of pension, savings are built up through a combination of your own and your employer’s contributions 
and the returns on investments made by the scheme that manages your savings. The government also contributes through tax relief.

You might be considering opting out of your workplace pension. But opting out means you will no longer receive the benefit of contributions from your employer.

You may be worried about recent falls in the value of the stock market and wonder how it impacts your pot. But bear in mind too that financial markets have recovered from shocks in the past.

It’s worth noting that the contributions you and your employer make to your pension now may buy a greater number of shares at a cheaper price. And professional investors managing your workplace pension pot may have already acted to position your investments, so they’ll be ready to benefit from an eventual recovery.

Also, remember DC pension savings benefit from a range of protections if companies looking after them get into trouble.

State pensions

Thirdly, there’s the state pension, which is paid by the government. The amount of state pension you will receive is based on the number of years you work or undertake specific caring activities such as bringing up children.

A few more things...

Also remember that if you are considering giving up pension saving, your family could miss out on valuable death benefits which are tied to your scheme.

For people in a defined contribution scheme who are close to retirement, it may be necessary to take stock of when you plan to retire and how much income you can expect to have. Consider getting free government advice from the Pensions Advisory Service or Pension Wise.

Finally, be wary of criminals who may try to scam you out of your pension. Be particularly careful of cold calls asking for your pension information or offering you unusually high investment returns or urging you to act by a short deadline. Report anything suspicious to Action Fraud.