If you’re a business owner, the last year might have been a challenge. You may have needed to find new ways of working, furloughed staff, or struggled to keep your enterprise afloat as the economy fell into a deep recession.
So, it’s perhaps no surprise that you might have reined in your expenditure if you wanted to survive the pandemic.
In November, This is Money reported that more than 5.5 million workers cut or completely stopped their pension contributions due to the impact of the pandemic. If you’re one of them, it’s quite possible you’ll need to boost your pension pot once things return to normal – or you could have a shortfall when you retire.
Pausing or reducing your contributions can leave you with a shortfall later on
If you’ve reduced or paused your pension contributions over the past few months, you’re not alone. However, missing out on more than a years’ worth of contributions could leave you with a shortfall in later life.
These figures from This is Money show just what an impact reducing your contributions could have. They are based on someone saving from age 21, on £20,000 a year and then increasing in line with inflation. It assumes investment growth of 5% per annum plus inflation.
Source: This is Money
This shows that even pausing your contributions for a short period can have a significant effect on the overall value of your fund at retirement. The effects are more pronounced if you are younger, as you miss the opportunity of benefiting from compound returns over many years or decades.
Missing pension contributions also means you’re losing out on valuable tax relief. If you’re a basic-rate taxpayer, every £100 contribution to your pension costs just £80 thanks to the tax relief. If you’re a higher- or additional-rate taxpayer, you can benefit from an additional 20% or 25% relief through your self-assessment tax return.
If you have paused or reduced your contributions, consider boosting the amount you invest when you can:
- Increase your regular monthly contributions.
- Pay in additional lump sums as cashflow permits. You can contribute up to 100% of your earnings or £40,000 in the 2021/22 tax year, and you may be able to “carry forward” any unused allowances from the previous three years.
- If possible, consider making pension contributions through your business rather than from your personal funds. Employer pension contributions made “wholly and exclusively for the purposes of the business” can receive Corporation Tax and National Insurance relief.
So far, we’ve looked at the impact of pausing or reducing your pension contributions if money has been tight in the last year. But what if restrictions and lockdown mean you’ve saved more during the pandemic?
What if you’ve saved more during the pandemic?
According to the Bank of England, UK savers collectively put away £100 billion in 2020, due to many people’s expenses being cut from the effects of the coronavirus lockdowns.
If you weren’t able to eat out, go on holiday, or have to commute to work you may have found you built up some handsome savings during lockdown.
However, research from LV= suggests that just 5% of people who saved money due to Covid-19 restrictions plan to pay the money into their pensions.
28% intend to contribute to savings accounts and Cash ISAs while one in five (21%) plans to use the extra money to book a holiday. 19% want to spend their savings on home improvements, 13% are using it for living costs and 12% want to use the money for essential home or vehicle repairs.
If you want to make the most of your savings, pensions can be a great way to save for the long term. As you read above, tax relief immediately boosts the value of your fund and the tax-efficient nature of pensions means there is great potential for your money to grow over many years.
A note if you’re near to retirement
If you had to close your business because of the coronavirus pandemic, this might have increased pressures on your finances. And, if you’re over the age of 55, you might be tempted to raid your pension fund for cash, especially if you don’t have significant savings to fall back on.
Indeed, figures from HM Revenue and Customs show there was a 6% increase in the number of people withdrawing cash from their pensions in the third quarter of 2020, compared with the same period the year before.
While you may be able to access your pension at age 55 there can be implications:
- You could lose some of your fund to tax depending on how much you withdraw
- The amount you could later save into a pension might be affected
- You may leave yourself with insufficient income for your retirement.
If you’re considering accessing your pension fund, it can pay to get professional advice. We can help you assess your situation and help you structure your income tax-efficiently. Email firstname.lastname@example.org or call 01454 416 653 to find out more.