Savers temporarily opting-out of their pension contributions to support them through the cost-of-living crisis could be hit with a “hidden trap”, modelling from Broadstone has warned.

Broadstone noted that someone on a £35,000 salary with a 5 per cent matched scheme who reduces their contribution by the full 5 per cent would consequently lose the employer contribution.

While they would be reducing their employee contributions by £145.83, they would not see all that money added to their net pay as the loss of tax-relief means that they would only add £116.66 to their monthly salary – with the £29.17 in additional tax costing them £350.04 over the course of the year.

Moreover, losing the employer contributions would mean that their total monthly pension contribution would fall to zero, meaning a total loss to their overall wealth of £175 every month.

This disparity becomes more dramatic for higher earners who might also be considering temporarily opting out or cutting back on their contributions.

Broadstone’s modelling explained that a person on a salary of £65,000 with the same contribution set up and reduction as the previous example would be reducing their employee contributions by £270.83, with a total monthly loss to their pension savings of £541.66.

However, the modelling found that the gain to their monthly net pay would be £162.50 a month, an overall decrease to their total wealth of £379.16, and a tax-relief gap of £108.33 between the reduction in their employee contributions and the benefit to their monthly salary income.

Previous research from Broadstone found that a 25-year-old on an average salary could miss out as much as £60,000 – or a quarter of their total pension saving potential – if a 2 per cent reduction in employee contributions became permanent.

Broadstone head of pensions and savings, Rachel Meadows, commented: “Opting out of their pensions may provide some short-term succour but will significantly reduce their total wealth accumulation every month, exacerbated by lost compound investment growth. It is why we are making three clear pleas to employers in the face of growing noise around employee opt-outs.

“Firstly, engagement and education are key. Group sessions for employees that clearly outline the benefits of pension saving and contextualise it within the wider lens of personal finances and wellbeing are crucial.

“Secondly, employers and schemes must maintain records of those staff who do decide to reduce contributions. This means once income pressures subside, they can ‘nudge’ savers every year to encourage them to restore payments back to at least recommended levels.

“Finally, we hope employers can apply rapid pragmatism to their pension scheme rules to ensure that employer contributions are not reduced (or even ceased completely) if employees need to reduce their own pension savings levels in the face of cost-of-living challenges.”

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