First-time property buyers have been warned not to take measures that could have a drastic impact on their future finances, according to a new study
First-time homebuyers have been cautioned against making the wrong savings cuts. A report from Legal & General (L&G) reveals that a shocking number of prospective homeowners are prioritising property over pensions, with nearly one in five saying they’ve either temporarily or indefinitely stopped, or reduced their pension contributions to buy their first home.
However, L&G warns this might not be the best strategy for securing your first home as it could severely impact your future finances. The main problem with interrupting your pension is the effect on your contributions.
Pension contributions, which are amounts paid into a pension scheme by an employee, employer, or the government, usually constitute a set percentage of an employee’s earnings and accumulate over time. Typically, employees contribute 8 per cent of their earnings to a pension, while employers are legally required to contribute 3 per cent.
L&G estimates that a 30 year old who stops their contributions for just one year could end up with £8,000 less in their pension pot. Moreover, if you halt your own pension contributions, you risk losing your employer’s matched contributions to your retirement fund, essentially forfeiting free money. You could also miss out on tax relief provided to your retirement fund.
Typically, the government will boost your pension contributions deposit with tax relief at your Income Tax rate, essentially the Income Tax that would have been paid on the contribution when it was part of your salary. Pausing your pension contributions even for a brief period means that any tax relief you could have gained on your contributions will be forfeited, further reducing your potential retirement savings.
The latest data from the Office for National Statistics reveals that about 79 per cent of UK employees are enrolled in a workplace pension. This suggests that if a significant number of people adopt this strategy, a concerning quantity of future pensioners could find themselves financially challenged when they’re no longer working.