I’m struggling to save for a home – should I opt out of my workplace pension to free up cash?

THERE’S nothing worse than looking at your payslip and seeing a huge chunk of your wages being taken before it’s even hit your account. Mortgage and rent bills have ballooned in recent years as millions continue to be walloped by the cost of living crisis. Choosing between pension contributions and saving for a home isn’t always a simple calculation Steve is director of policy and research at workplacepensions and savings provider Cushon Average rent costs in England are currently £1,451 a month, according to the Office for National Statistics. That’s £601 higher than the average rent bill between October 2022 and September 2023, which was £850. Sign up for the Money newsletter Thank you! Over a year, that’s £7,212 more that renters are paying now compared to three to four years ago. And if you’ve made the step onto the property ladder, then you have also had to contend with higher mortgage rates. Conflict in the Middle East has prompted mortgage rates to increase, putting further pressure on households’ costs. If someone took out a typical mortgage now, compared to the start of March, it would cost them around £1,360 a year more in repayments on a two-year fixed deal, according to Moneyfacts. In March, the average two-year fix stood at 4.84%, compared with 5.61% now. Worse still, borrowing the same size loan on a typical mortgage now, compared to 2021 on a five-year fixed deal, would cost around £4,834 more in mortgage repayments over one year. Most read in Money (AD) Get free mortgage advice and potentially save THOUSANDS Mortgage Advice Bureau (MAB) is offering Sun readers FREE mortgage advice. *If you click on this link we will earn affiliate revenue The mortgage broker has access to nearly all lenders in the UK, and their independent professionals are here to help find the best deal for first-time buyers, remortgage borrowers, house purchasers, and landlords. Normally, this advice comes at a price. But Sun money readers can use their services for free by using the link below. Schedule your first visit for free mortgage advice Mortgage Advice Bureau Limited. Registered Office: Capital House, Pride Place, Derby. DE24 8QR. Registered in England Number: 3368205 In August 2021 , the average five-year fix stood at 2.75%, compared with 5.64% now. So, if you are paying into a workplace pension, you may be tempted to opt out temporarily and redirect the money into your house fund. Doing so can increase your take-home pay, helping you reach your target sooner. But it also means giving up money from your employer, tax advantages and potentially decades of investment growth. Steve Watson is director of policy and research at workplace pensions and savings provider Cushon. He specialises in pension policy, financial wellbeing and helping workers balance saving for retirement with more immediate goals, such as buying a home. He says opting out of a workplace pension should usually be a last resort, as workers risk losing employer contributions, tax benefits and years of potential investment growth. Follow his tips and you could build your house deposit without putting your future retirement income at risk. Should I ditch my workplace pension? Opting out might leave you with more money each payday but it will have a long term impact Credit: Getty For most workers, the answer is likely to be no. Opting out might leave you with more money each payday, but the boost to your take-home pay may be smaller than you expect. This is because pension contributions can benefit from tax relief. Some employers also operate salary sacrifice schemes, which can cut the amount of National Insurance tax you pay. That means stopping £100, for example, from going into your pension will not necessarily leave you £100 better off in your bank account. Worse still, you will normally lose your employer’s contribution as soon as you leave the scheme. Steve said: “By opting out, you’re not only stopping your own contributions, but you’re also giving up valuable employer contributions, tax relief and missing out on years of investment growth.” Of course, buying a home is an important financial goal. Owning rather than renting could also make life cheaper in retirement, particularly if you manage to clear your mortgage before you stop working. As many as one in three UK pensioner households could be renting by 2044, according to research from the Association of British Insurers (ABI) and the Pensions Policy Institute (PPI) But that does not mean you should ignore your retirement savings altogether. Steve said: “Buying a home is an important financial goal, but so is building long-term financial security.” How much ‘free cash’ could you lose? You would lose a significant amount of money from your employer by opting out Credit: Cover Images The biggest sting in the tail, if you choose to opt out, is the money you would lose from your employer. Under automatic enrolment rules, the minimum total workplace pension contribution is usually 8% of your qualifying earnings. Your employer must pay at least 3%, while the remaining 5% usually includes your contribution and tax relief. Qualifying earnings are the portion of your annual income between £6,240 and £50,270. So, if you earn £35,000, your qualifying earnings would be £28,760. At the legal minimum rate, your employer would put in around £863 a year. Over ten years, that adds up to more than £8,600 – and that is before any investment growth or salary increases are taken into account. Some employers are even more generous. They may calculate contributions using your whole salary, pay more than the legal minimum or match extra payments you make. For example, 3% of a full £35,000 salary would be £1,050 a year, or £10,500 over a decade before growth. Steve said: “Employer contributions are one of the biggest financial perks available to employees and are often described as ‘free money’ because they’re paid in addition to your salary. “Under auto-enrolment rules, employers must contribute at least 3% of qualifying earnings, although many employers pay significantly more. “If you opt out, those payments stop immediately.” He added: “Walking away from employer contributions is effectively turning down part of your overall pay package. “Why would you work for less than your colleague doing the same job?” Before making any changes, check your latest pension statement or speak to your HR department. Ask exactly how much your employer pays and whether it will match higher contributions. You could be giving up far more than you realise. The real cost of taking a break Pension money is invested, giving it the chance to grow over the years Credit: Getty It is not just the cash paid into your pension that you will miss. Pension money is generally invested, giving it the chance to grow over the years. You can then earn returns on previous returns, which is known as compounding. Let’s say you invest £1,000 and your investments achieve 5% growth in a year, you’ll have £1,050 at the end of that year. The extra £50 is your investment growth. With compound growth, you don’t just achieve investment growth on your original £1,000 – you also earn it on the £50 you made in the first year. It is a bit like a snowball rolling downhill – the longer it rolls, the bigger it can become. This makes money paid into a pension in your twenties and thirties especially valuable, as it should have decades to grow. Steve said: “Pension savings benefit enormously from compound returns, meaning money invested in your twenties and thirties has decades to grow. “Even taking a break for just a couple of years could leave you with tens of thousands of pounds less in retirement.” Exactly how much you could lose will depend on your age, salary, contribution level and how long you remain outside the scheme. Investment performance and pension charges will also affect your final pot, and returns are never guaranteed. But the earlier you stop paying and the longer the break lasts, the bigger the potential damage. Can I save for both a house and my pension? It doesn’t have to be a straight choice between buying a home and saving for retirement Credit: Getty It does not have to be a straight choice between buying a home and saving for retirement. A better option may be to continue paying enough into your pension to unlock your employer’s maximum contribution, while directing any spare money towards your deposit. Steve said: “There’s no one-size-fits-all answer because everyone’s circumstances are different. “For many people, the ideal approach is to continue contributing enough to receive the full employer contribution while directing additional savings towards a house deposit. “That way, you’re not giving up valuable pension benefits while still making progress towards home ownership.” You may already be paying more than the minimum required by your scheme. If that is the case, ask whether you can temporarily reduce your contribution instead of stopping it completely. But check the small print carefully, as your employer may cut its contribution if you cut yours. Steve said: “Owning a home can improve financial security later in life by reducing housing costs during retirement, but that shouldn’t come at the expense of having too little pension income. “The key is to look at both goals together rather than treating them as competing priorities. “A financial plan that supports buying a home while maintaining retirement savings is usually the strongest long-term strategy.” When might a pause in contributions make sense? There are some situation where a short break from contributions could be understandable Credit: Getty There are some situations where a short break could be understandable. You might only be a few months away from hitting your deposit target and have a rock-solid plan to restart payments as soon as you buy. Or, you may be battling a temporary squeeze caused by sky-high childcare costs, an emergency bill or another unexpected expense. Steve said: “There can be situations where temporarily opting out is understandable, but it should generally be viewed as a last resort rather than a default strategy. “For example, someone who is only a few months away from securing a deposit, has a guaranteed plan to rejoin their pension quickly, and has already built a reasonable level of retirement savings may decide that a short pause is worthwhile.” The key word, however, is “short”. It can be very easy to promise yourself you will restart your pension next month, only for another bill or expense to get in the way. Before you know it, a six-month break could have turned into several years. Steve said: “The important thing is to make it a conscious, time-limited decision rather than allowing years to pass without restarting pension contributions.” Could a lifetime Isa give you a boost? A Lisa could be a better way for first time buyers to supercharge their deposit Credit: Alamy A Lifetime Isa (Lisa), commonly known as a Lisa, could be a better way for some first-time buyers to supercharge their deposit. You can open one if you are aged between 18 and 39 and pay in up to £4,000 each tax year. The Government adds a 25% bonus, worth up to £1,000 a year. That means paying in the full £4,000 could leave you with £5,000 before any interest or investment returns. Steve said: “For eligible first-time buyers, a Lisa can be one of the most generous ways to save for a deposit. “That bonus is effectively an immediate return on savings and can significantly boost a deposit over several years.” But there are some important catches. The account must have been open for at least 12 months before you use it to buy your first home. The property must cost £450,000 or less and you will normally need to be buying it with a mortgage to live in as your main home. Taking the cash out for another reason before you turn 60 usually triggers a 25% withdrawal charge, unless you are terminally ill. This charge does not simply claw back the Government bonus – it can also eat into your own savings. For example, if you paid in £4,000 and received a £1,000 bonus, you would have £5,000. A 25% charge would knock off £1,250, leaving you with just £3,750. Steve said: “For many first-time buyers, using a Lifetime ISA alongside continued workplace pension contributions can be a more balanced solution than opting out of a pension altogether.” The government has also launched a consultation to replace the Lisa with a simpler First-Time Buyer ISA. However, key details have not yet been confirmed — including how much savers will be able to pay in, the size of the Government bonus and the maximum property price that will qualify. Existing LISA holders are expected to be able to keep paying into their accounts under the current rules. Other ways to find spare cash You should try and cut your spending before cancelling your pension contributions in order to boost your savings Credit: Getty Before raiding your retirement pot, give your finances a proper spring clean. Go through at least three months of bank statements and look for subscriptions, memberships and other regular payments you no longer need. Shopping around for cheaper broadband, mobile phone and insurance deals could also free up cash for your deposit. If you receive overtime, a bonus, a tax refund or birthday cash, consider moving it into your house fund before you have a chance to spend it. Steve said: “People could review monthly spending, cut discretionary costs, shop around for cheaper household bills, refinance expensive debt where appropriate, or use bonuses, overtime or side income to accelerate savings. “Even relatively small savings made consistently across household bills, subscriptions and insurance can add up over time without sacrificing valuable employer pension contributions.” It may also be worth speaking to a mortgage broker. They can explain how large a deposit you realistically need and which deals might be available to you. What if I still want to opt out? Pick a deadline to begin contribution to your pension again Credit: Getty If you decide to go ahead, don’t leave your return date to chance. Pick a clear deadline or financial milestone for rejoining, such as reaching your deposit target or completing your purchase. Put reminders in your phone and calendar so the date doesn’t pass you buy. Steve said: “Anyone who decides to opt out should have a clear plan from the outset. “Set a target date or financial milestone for rejoining, such as reaching your house deposit or completing your purchase.” If your finances improve later, you could also consider increasing your contributions to help make up some of the shortfall. Steve added: “Once that goal is achieved, restarting contributions as soon as possible helps minimise the impact on retirement savings. “The biggest risk isn’t taking a short break – it’s forgetting to restart and missing years of valuable employer contributions and investment growth.” Comment now