Why you should keep your working pension

Rising prices and tighter budgets make it tempting to cut anything that is not urgent. For many people, that puts pension contributions under the spotlight. The instinct is understandable. When cash flow is tight, you look for room to breathe. Yet with workplace pensions, short-term relief often comes at a long-term cost. Your contributions unlock employer money, benefit from tax relief, and gain time in the market. That trio is hard to replace once you step away.

A good starting point is the State Pension, because it anchors retirement income for most people, but it rarely covers a comfortable lifestyle by itself. The full new State Pension for 2025 to 2026 is £230.25 per week, which works out to £11,973 per year. To get anything at all you usually need at least 10 qualifying years of National Insurance, and to get the full amount you generally need 35 qualifying years. Those facts matter, because they show the base layer you can expect and the gap you may need to fill with your own saving.

Independent benchmarks also help you picture that gap. The Retirement Living Standards suggest that a single person needs about £14,400 per year for a minimum lifestyle under today’s prices, which is above the full new State Pension. If the State Pension provides about £11,973 at full rate, you can see why private savings through a pension are important.

What makes the workplace pension so valuable is that you are not saving alone. UK auto-enrolment rules require a total minimum contribution of 8 percent of qualifying earnings, with at least 3 percent from the employer and the remainder from you and tax relief. That is a legal floor, and many employers pay more. Qualifying earnings are counted only between the lower and upper thresholds, which for recent years have been £6,240 and £50,270. The effect is simple. Every time you contribute, your employer puts money in too, and the tax system helps, which pushes your savings further than cash you set aside outside a pension.

If you are thinking about opting out, it helps to understand eligibility and thresholds. Most workers are automatically enrolled if they are aged 22 up to State Pension age, usually work in the UK, and earn at least £10,000 a year. If you earn less than that but at least the lower threshold, you can usually join by asking, and if you are contributing the employer must still pay in. That means even part-time or fluctuating earners can benefit from employer money if they opt in.

Tax relief is the second big lever. Workplace schemes give tax relief in one of two main ways. Under a net pay arrangement, your contribution is taken from pay before income tax, so you get relief right away through payroll. Under relief at source, your provider adds 20 percent basic-rate relief to your contribution and higher-rate taxpayers claim the extra through HMRC. For lower earners in net pay schemes, a government top-up was introduced so they are not left worse off than if they were in relief at source. Understanding which method your scheme uses is important, because it affects your payslip and whether you need to claim extra relief.

There is also salary sacrifice, sometimes called salary exchange. With this setup you agree to reduce your salary and your employer contributes the surrendered amount to your pension. Because the reduction happens before income tax and National Insurance, both you and your employer save NI, and some employers share their NI savings by adding them to your pension. This can increase take-home pay compared with contributing the same amount outside salary sacrifice, though you should weigh effects on mortgage affordability or pay-linked benefits that use your post-sacrifice salary. Ask HR if your scheme offers it and how they treat employer NI savings.

If you are still leaning toward opting out, make the decision with full information about timings and consequences. After you are enrolled, there is a one-month opt-out window that allows a full refund of your contributions. If you leave later, your pot normally remains invested and accessible only from the normal minimum pension age, and you miss ongoing employer contributions during that time. You can usually rejoin later, and your employer must re-enrol you at least every three years if you stay eligible, but any months out are months without free employer money or tax-boosted growth.

It is also wise to plan around the current allowance rules, because they define how far you can push contributions in a high-saving year. The standard annual allowance is £60,000 for 2025 to 2026, with tapering for high incomes and a money purchase annual allowance of £10,000 if you have already flexibly accessed a defined contribution pension. Most employees will never hit these limits, but knowing them gives you room to increase contributions when your budget allows, for example after a pay rise, a bonus cycle, or once other debts are cleared.

You may also have heard the Lifetime Allowance has gone. That is correct. The LTA was abolished from April 2024, and in its place the system caps tax-free lump sums through new allowances. For most people the lifetime tax-free lump sum limit is now £268,275, with a separate total for tax-free lump sums paid on death before 75. If you had historic LTA protections or took lump sums before April 2024, there are transitional rules and certificates that can preserve higher limits. This change does not reduce the day-to-day value of paying into a pension. It mainly affects how lump sums are taxed when you draw benefits, so it is something to note for future planning rather than a reason to opt out now.

So how do you decide what to do in a cost of living crunch. Start with your essentials, because missing priority bills carries bigger consequences than missing a pension payment. If your budget is under strain, consider reducing contributions rather than stopping entirely, and aim to pay at least enough to capture the full employer contribution available in your scheme. That way, you do not walk away from money your employer would have added on your behalf. If your employer offers salary sacrifice, explore whether switching could lower your tax and NI to keep your net pay steadier while maintaining contributions. If you must cut back, set a reminder to review your contributions in a few months and dial them back up as soon as you can.

It is also worth confirming a few practical details with HR or your provider before you act. Ask which tax relief method your scheme uses, because higher-rate relief claims are your responsibility in relief-at-source setups. Confirm whether you are already using salary sacrifice and if any employer NI savings are shared. Check your contribution level relative to qualifying earnings if you have multiple jobs or variable hours, since thresholds can affect the amount paid in. Finally, download or request your latest annual statement and keep your nominee details up to date, since that guides how benefits are paid if something happens to you.

One more reason to stay in comes from the calendar. Retirement can easily last twenty years or more. The earlier and more consistently you contribute, the more you benefit from compounding returns across market cycles. Even small monthly contributions made in your twenties, thirties, or forties can grow into meaningful income later, especially when every pound you put in is joined by employer money and tax relief. When budgets are tight, that can be hard to feel in the moment, but the long-term math is powerful.

In short, a workplace pension is designed to stack the deck in your favor. Employer contributions add to your pot without hitting your take-home pay. The tax system boosts what you put in. Rules let you increase contributions when life allows, and the removal of the old Lifetime Allowance means the focus is now mostly on how you take your benefits rather than how big your pot gets. Unless you have urgent reasons, most people are better off staying in and adjusting the dial rather than switching the pension off entirely. If you are unsure, a session with a regulated adviser or a free guidance appointment can put this choice in the context of your goals, debts, and risk comfort, so you can make a confident decision that supports both your present and your future.