How to protect your pension in the cost of living crisis

With households facing double-digit inflation eating away at their budgets, there is a severe danger that family finances could be left scarred for years or even decades to come. 

But, although some short-term damage is almost inevitable, there are steps you can take now to protect your finances for the future. 

Here are eight. 

Keep going: The rising cost of living is making life difficult for many, but there are actions you can take now to secure your financial future

1. Keep contributions ticking over 

When things are tight, it can feel hard to justify saving for a distant future. Indeed, some people may find they have no choice but to pause pension contributions. 

But it is vital to think carefully before putting such payments on hold. You would lose out on free money from your employer and the taxman, which otherwise would be added to your pension automatically. 

Even a year of paying no contributions can have a significant impact on your wealth in retirement, especially if you are still early on in your career.  

>> Pensions in 2023: What savers and retirees need to know, from tax raids to future of the triple lock and whether the state pension age will change 

Take, for example, a 22-year-old earning £25,000, and contributing eight per cent into their pension annually. They could have a fund worth £393,000 by the age 68, according to calculations from investment platform AJ Bell. 

Yet if they delay saving by just one year, their fund at retirement age could be worth as much as £12,000 less. The calculations assume their income rises by two per cent each year and their investments grow by four per cent after fees. Anyone on Universal Credit could lose even more. 

Someone cutting their contributions by £100 could lose at least £200 from their pension fund, and would only gain an extra £45 to spend, according to leading financial expert and consumer champion Baroness Ros Altmann. 

‘When your entitlement is calculated for Universal Credit and means-tested benefits, the impact of pension contributions is often ignored altogether,’ she says. ‘That means that if your income is lower because you pay into your pension, you will receive extra benefits.’ 

So far, auto-enrolment rates have remained impressively resilient. The proportion of auto-enrolment members who have opted out or stopped saving stands at just 3.1 per cent and is no higher than it has been in the past two years. 

However, many workers are considering doing so, according to a recent survey by The Pensions Management Institute. 

2. Delay your state pension if you can

For many, becoming eligible to claim the state pension could not come soon enough. 

But if you can do without claiming it for a while, the income you eventually receive will be more generous. 

The Government will increase your state pension income by one per cent for every nine weeks you defer. That means that someone eligible for the full flat-rate state pension of £185.15 per week could increase theirs by £10.70 if they delay by a year. 

The savings can add up, if you have a long retirement. However, this option is not for everyone so do your research first. 

>> Cost of living survival guide for pension savers

3. Drip feed rather than invest large amounts

Investing when markets are turbulent can be stomach-churning. 

To avoid the biggest lurches, invest small amounts regularly rather than lump sums. In this way, you’ll avoid investing a large sum just before markets fall – although by the same token you will also not be putting your money in right before they rise. It’ll make for a smoother investing journey. 

Over the short term, investors are likely to experience a bumpy ride. But markets tend to rise over the long term. 

Watch out: Paying an extra one per cent in charges can cost tens of thousands of pounds over the long term

4. Check that your fees are not too high

When you’re working hard to save into a pension, the last thing you want is your returns snatched from you in the form of fees charged by your investment platform or pension provider. 

Needlessly paying an extra one per cent in charges can cost tens of thousands of pounds over the long term. Take, for example, a £50,000 pot that enjoys five per cent investment returns per year before fees. 

With charges of 1.5 per cent, this fund will be worth around £105,000 after 30 years, according to calculations by AJ Bell. 

But with charges of just 0.75 per cent, it will be worth an additional £25,000. 

Check what fees you are paying on your pensions – both current ones and those you are no longer paying into. If they are high, consider switching provider. 

Savers putting money into defined benefit – known as final salary – schemes are unable to switch. You may not be able to switch from your current workplace pension scheme either.

5. Wait to take out 25% lump sum  

Savers are entitled to withdraw up to a quarter of their pension from their pot tax-free when they reach the age of 55. 

Thousands rush to take it as soon as they are eligible, whether they need it or not. But if you have no urgent spending plans, it could be worth leaving some or all of it invested. 

For example, if you left a £100,000 pension pot invested until the age of 66, it could be worth £154,000 – £15,000 more than if you withdrew 25 per cent at age 55. 

6. Hold your nerve…and stay invested

Seeing the value of your pension drop due to market volatility can be painful. 

It can be tempting to move it into what feels like safety, by shifting it into a savings account. 

But once you sell investments, you have locked in those losses. By staying invested, hopefully you will have time to regain those losses in time. 

If you find it hard to avoid the understandable knee-jerk reaction to sell, avoid checking your portfolio too often. 

If you have a good strategy for your investments and are saving for the long term, you should not need to look at your portfolio more than every few months, unless your circumstances change. 

7. Take out only what you really need to 

If you are already drawing down your pension, try to take only what you need. Removing money from your pot when its value has fallen means you are locking in those losses. 

Try to minimise withdrawals and spend from other pots you may have, such as cash savings, first. However, as the cost of bills rises, this is easier said than done. 

8. Finally, beware scams 

Fraudsters thrive in times of fear and uncertainty. 

Protect yourself by asking yourself a few questions before making any changes to your pensions or investments. 

Cold calls about pensions are illegal, so if someone contacts you out of the blue offering a service such as a ‘pension review’, it is likely to be a scam. 

Before transferring any pension, make sure the person or firm you are dealing with is regulated by the Financial Conduct Authority and is authorised to offer pension advice. 

Don’t rush into doing anything – take time to do research and get a second opinion. 

This post first appeared on Dailymail.co.uk