The coronavirus crisis is hurting most of us in some way, and for many of us this pain is financial. It is certainly forcing me and my partner to be a lot more careful with how we spend our money. It is a crisis after all!
So most of us are thinking of ways to cut down on our spending, and it is no surprise that for some the question of whether to lower or cancel their pension contributions altogether might arise. Especially when you’re young, paying into a pension might seem like an optional extra cost. And when you’re short on money, putting hundreds away for some distant future feels like a total waste.
Unfortunately, though, contributing to a pension is extremely important and stopping now is a really bad idea. If you can cut down on anything else, do this instead. Online shopping? Alcoholic beverages? Subscription services? Anything else will do, but leave the pension alone. Your future self will definitely thank you.
If you are employed in a company in the UK, you save into a pension automatically, unless you specifically choose not to. This is called auto-enrolment. The minimum amount you have to invest every year is 4% of your pension, while your employer must pay 3% and the government 1% (this is different if you're self-employed).
And the earlier you start investing, the better off you will be when you finally retire due to the power of compounding interest. To put it simply, interest is a percentage of your total pension pot. If you get a return of say 5% per year on your total savings, the actual amount will increase every year along with the size of your pot. The earlier you start saving and the more you put in, the more returns you get (sort of like the more time you put into tending your garden, the better it grows).
According to PensionBee, if you start saving 15% of a £30,000 salary at the age of 30, your pension pot may be worth around £196,100 on retirement. If you don’t start a pension until you’re 45, the same level of contributions may build a pension pot worth around £109,500 by retirement.
If you stop paying into your pension now, you savings will grow more slowly, and therefore the amount of interest you get every year will also be lower.
Additionally, all the money you put into your pension is invested in company shares, bonds, and various other things. Investing in these things now means you catch them at lower prices, because markets have gone down as a result of the crisis. It’s sort of like buying clothes in a sale. If you wait until the crisis is over, the prices of shares and bonds will also go up, so you will have missed the “sale”.
You can find out more about pensions, as well as how to make sure your money is invested sustainably, in The New Money Pension Manual, which I co-authored with the founder of New Money, Rebecca Jones. It is aimed at UK-based readers, but the basic information at the beginning is translatable to other countries.