Published On: Wed, Feb 9th, 2022

Pension warning – you could ‘wipe out’ £70,000 of retirement savings in just three years | Personal Finance | Finance

Pensioners who fail to max out their National Insurance (NI) contributions can lose thousands of pounds in State Pension. Workers who take a short break from paying into a company or personal pension scheme could lose even more, experts warn.

Missing just a few years of State, company or personal pension contributions could “jeopardise your chances of enjoying a fun-filled, secure retirement”, warns pension expert Carla Morris, a financial planner at Brewin Dolphin

Taking a three-year pensions break at the wrong time could wipe £70,000 off your total pension pot by the time you retire, she calculates.

The younger you are the greater the damage, because you will sacrifice decades of growth on the contributions you have missed.

Similarly, failing to make the full 35 years of National Insurance contributions will punch a hole in your retirement income, as you will not get the full basic State Pension when you retire.

Millions of women drop out of the workplace to raise children, and see their pension savings depleted as a result.

Others miss out due to a long period of illness or unemployment, while some do it by choice, by taking a career break, say, to travel or pursue a hobby or other interest.

This could slash the value of your State, workplace and personal pensions.

If a 25-year-old earning £27,000 a year made workplace pension contributions averaging five percent throughout their career, their pot could be worth just over £360,000 at age 67, Morris calculates.

This assumes an annual return of five percent after charges and yearly pay rises of 1.5 percent, plus salary increases from promotions.

READ MORE: Pension warning – just ONE mistake could wreck your retirement

However, if they took a three-year break at 30 and made no pension contributions in that time, their pot would shrink to around £290,000.

That’s an incredible £70,000 less.

The break is also likely to delay promotion-linked pay rises, which will shrink future pension contributions, as they are based on salary size.

Brewin Dolphin’s analysis shows that if you withdraw £20,800 a year from a £360,000 pension your pot would last until age 91, but only to 85 if you had a £290,000 pension. “Unless you made large cutbacks, you’d have a much higher risk of running out of money,” Morris said.

Options include continuing to pay into a pension during your career break, if you have the money, or increasing contributions when you return to work.

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You can plug gaps in your State Pension record by claiming National Insurance credits, says Stephen Lowe, pension specialist at Just Group.

NI credits are primarily aimed at mothers who give up work to raise a family, so can be claimed by those looking after a child under 12, while on maternity or paternity leave, or receiving adoption pay.

“You can get them for any period when you were claiming benefits due to ill health or unemployment,” Lowe says.

Registered foster carers, or those caring for at least one sick person with disabilities for at least 20 hours a week, may also be eligible.

As will people who were unemployed and claiming jobseekers’ allowance, or enrolled on approved full-time training.

Others can buy additional State Pension by making Class 3 voluntary contributions, adds pensions specialist Andrew Tully, technical director at Canada Life.

These cost £800 for one year’s pension, boosting your State Pension by around £250 a year for life, Tully said. “That’s a great deal.”

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