Savers breaking away from pension contributions in their mid-20s could lose out on tens of thousands of pounds, research conducted by Aegon has found.
The analysis looked at the potential eventual losses to the pension pot of a 22-year-old, who joined a workplace pension scheme on an average starting salary of £20,000, if they decided to stop paying their pension contributions.
It concluded that a break of 10 years could mean losing almost £100,000 (£91,600) of the total pension fund by state pension age. A break of one year could result in a loss of £7,000 of the total pension fund at state pension age and a break of five years could mean losing £42,100.
Indeed, taking a break for just one year at 25 could save the employee £622 from ceasing contributions but could mean losing £7,300 from their total pension fund when they reach state pension age, Aegon said.
‘Avoid where possible’
According to the group’s pensions director Steven Cameron, the recent rise in minumum contribution levels may mean some employees are considering taking a break from their workplace pension scheme.
“The temptation may be particularly strong for younger workers, many of whom will be paying off student debt and saving for a house deposit,” he said, adding opting out should be “avoided wherever possible”.
“While you may increase your take-home pay, you are very likely to lose out on a valuable employer pension contribution,” Cameron explained. “The boosts from employer contributions and also the government ‘tax relief’ top-up mean taking a break from contributions effectively means sacrificing ‘free money’.”
Cameron argued people should save money by exploring other areas they could cut back on, adding: “Having gaps in your pension-saving history may be something you will regret later on in life.”