Opt out of pension? How to make up a pension shortfall
Workers who opt out of their pension amid the cost of living crisis will need to pay around three times more than they save to make up the shortfall

If you’re thinking about opting out of pension payments to get through the current cost of living crisis, you’re not alone.
One in five workers has already reduced their pension contributions or opted out completely in the past 12 months, while another 20% are actively considering doing so this year, according to the Pensions Management Institute.
This is around 6.6m people - or 13.2m if you include those considering making changes.
But opting out of your pension won’t save as much as you think when you factor in losing tax relief and employer contributions.
For example, a one-year break from contributing 8% of a £30,000 salary towards your pension would save you £100 a month (or £1,200 a year) of your own money – but you’d lose tax relief as well as employer contributions of £2,400, meaning you’d be around £5,000 worse off.
Ex-Pensions Minister Steve Webb also wrote for The Money Edit about why stopping pension contributions to ease the cost of living crisis could be a big mistake.
Plus, for women who will typically retire with significantly smaller pensions than men, it will leave them at even greater risk of a poorer retirement if they decide to temporarily stop saving for later life.
That said, if you absolutely must stop altogether even after understanding all the implications for your pension, then it’s advisable to do so with a view to resuming them as soon as possible when things have become easier financially.
Alice Guy, Personal Finance Editor, interactive investor, emphasises the need for an action plan: “If you do need to cut your pension contributions, then it’s important to have a plan to make up the difference in the future. It will usually cost more to pay extra into a pension later on as you’ll miss out on matched employers’ contributions and your investments will have less time to grow.”
Opt out of pension? How to make up a pension shortfall
How to make up pension shortfall
Making up the cost of the shortfall can be many times the cost of the initial saving. The investment platform interactive investor has helped us with some figures.
Let’s take the example of a 30-year-old who earns £30,000 and pays 8% alongside a 3% employer contribution:
- If they save £3,840 over two years by cutting pension contributions they could end up with £35,940 less in their pension pot by the time they reach 65 years old (assuming 5% investment growth).
To make up the shortfall after two years they would have to:
- Start contributing at the level they were contributing before (8% alongside a 3% employer contribution)
- Plus pay in an extra £36 a month.
This may not sound like much but it means paying an extra £11,405 over the remaining 33 years to make up the difference - that’s almost three times more than the £3,840 they saved to make up the difference later on.
Similarly, a 40-year-old who earns £70,000 and pays 8% alongside a 3% employer contribution:
- They could save £6,720 over two years by cutting their pension contributions
- But it would cost them £50,942 less in their pension pot by the time they reach 65 years old (assuming 5% investment growth)
To make up the shortfall they would have to:
- Start contributing at the level they were contributing before
- Plus pay an extra £99 a month
This means adding up to an extra £27,324 in contributions over the remaining 23 years to make up the difference - that’s three and a half times more than the £6,720 they saved to make up the difference later on.
Make up pension shortfall as soon as you can
Becky O’Connor, head of public affairs at PensionBee, suggests setting regular budget reviews and making minimal contributions as and when you can.
“Set regular budget reviews in your diary so you can quickly identify the first opportunity you have to increase your contributions back up to where they were before - perhaps if you have a pay rise, or your energy bills go down, or you get that break from council tax in February and March - whatever it is, consider it an opportunity to get back on track.”
She adds: “Even if you don’t manage to resume them to quite the same level as before. Something is always better than nothing.
Katie is staff writer at The Money Edit. She was the former staff writer at The Times and The Sunday Times. Her experience includes writing about personal finance, culture, travel and interviews celebrities. Her investigative work on financial abuse resulted in a number of mortgage prisoners being set free - and a nomination for the Best Personal Finance Story of the Year in the Headlinemoney awards 2021.
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