Warning as common pension mistake could cost you £13,600 – how to avoid it

WORKERS could be making one major mistake that costs them THOUSANDS of pounds later on in life.

Plenty may be tempted to pause their pension contributions to ease financial burdens brought on by the cost of living crisis – but it could hurt them further down the line.

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Many employees have seen their take-home pay squeezed thanks to tax hikes and the onslaught of inflation.

And with rocketing bills waiting to be paid each month too – from hefty energy fees, to blown-up broadband costs – it’s leaving households with less and less.

You could choose to opt out of funding your retirement now in a bid to have more money in your pocket today though.

If you chose to opt-out of the payments you might see your take-home pay rise a little – you wouldn’t be sending off a set amount to your pension pot every four weeks after all.

This could help unload some money pressures in the short term, but you might pay for it at retirement age.

Pensions experts have warned against the move as it could mean you miss out of thousands of pounds.

Analysis from investments giant, Aegon, shows that one year dipping out of the payments could mean you miss out on £4,600.

Skipping the contributions for two years could mean a massive £9,100 slips through your fingers.

And leave it three years before you re-join the scheme, and you could loose out on a whopping £13,600.

Aegon explains that those estimates are based on a 25-year-old on an average salary of £29k, and making pension contributions of £75 a month.

The figures are also based on this amount increasing each year by 3% and investment growth 4.25%.

But the exact amount you could miss out on depends on how much you’re earning, how close to retirement you are and how your pension is invested, among other factors.

Though overall, while you might feel better off in the short term saving this cash, it could cost you thousands later.

Kate Smith, head of pensions at Aegon said: “Those looking to cut back on their pension contributions should carefully consider the long-term effects before making any decisions.

“While there may be a small immediate boost to take-home pay, Aegon analysis shows it could leave you thousands of pounds worse off in retirement.

“What’s more, employees who pause pension contributions will very likely lose valuable employer contributions which help to boost retirement savings.”

Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.

It means you’re automatically opted-in to make the monthly payments once you earn over £10,000, which is why you might see your wage dip on your pay slip.

There are minimum contributions of 5% that you and your employer must pay, though you can put in more.

You also get cash from your employer of 3%, though some employers put in more – it depends who you work for.

Your minimum contribution applies to anything you earn over £6,240 up to £50,270.

Should you decide to take a short hiatus from your pension payments though, you would save some money now.

After one year of pausing your contributions your bank account could be £893 heavier, explained the finance experts.

That’s the equivalent of almost £75 a month held back.

Two years means you could stow away another £1,796, while those who leave it three years will have saved £2,711 on take home pay, they said too.

The government announcement last September that National Insurance rates would rise to support social care funding, but it means tax payers are already forking out a lot more.

On top of that the continued freeze on income tax bands drags more people into paying a larger proportion of their salary on income tax – particularly when their pay packets go up.

But rising inflation has eroded purchasing power, making it harder for shoppers to pick up the same essentials from the supermarket shelves and more.

In response, they might try something like skimping out on their pension contributions to save in the short term.

But not only would you loose out on what you put in, further down the line, but you could miss out on your boss’ contributions too.

Aegon explained that a one-year pension break would mean missing out on £683 of contributions from an employer.

And forfeiting these valuable contributions could effectively mean you lose out on “free” money.

Martin Lewis has issued his own warning to retirees, as he revealed the easy check you need to do NOW or risk losing out on thousands more in retirement.

Meanwhile, millions have been urged to check if they qualify for extra help for their pot worth up to £3,300 a year.

This post first appeared on thesun.co.uk