Taking a career break to look after your children or travel the world could reduce your pension savings by up to £80,000, new figures show.
Analysis by Standard Life has found that a typical saver who took a 16-year break from employment would be £77,000 worse off in retirement than those who worked for the whole time.
Its analysis found that by consistently saving the minimum of 8 per cent into your pension from age 22, you could achieve a pot worth £210,000 by age 68.
That assumes a starting salary of £25,000, with your pension seeing 5 per cent annual investment growth, 2 per cent inflationary impact and an annual management charge of 0.75 per cent.
But if you took a career break of 16 years, such as while your kids are in school, you would end up with a pot worth just £133,000 by 68.
Even smaller gaps can have a sizeable impact on your pension. Taking just one year out of work, such as to go travelling, could reduce your pot by £5,000, with a three-year break costing you £15,000.
It comes after new analysis by the Government has found that 15 million people are currently under-saving for retirement, meaning they won’t have enough to live on in later life.
Dean Butler, managing director of Retail Direct at Standard Life, said: “While dropping everything and taking time out is very tempting, and sometimes unavoidable, in reality, the financial impact can be quite stark.
“Even short gaps in employment can have a lasting impact – not just due to the loss of earnings during that time, but also because of the often-overlooked hit to your pension, with both your own contributions and your employer’s pausing.
“These missing payments can really add up by retirement.”
How to boost your pension if you take a career break
Make the most of ‘pension tax relief’
If you’re planning to take a career break, it could make sense to put more into your pensions in advance to make the most of free cash via ‘pensions tax relief’.
When you pay into a pension, the government tops up your contributions. This is known as ‘pension tax relief’. For every £100 a basic rate taxpayer puts in, the government boosts it by £25.
The more you contribute, the more free cash you’ll get – so increasing your contributions early will boost your pot.
This larger amount will then continue to grow over your career break as your investments grow.
Make extra contributions
If you’re able to, experts say it’s a good idea to keep making your own contributions to a personal pension during your career break, even though you won’t be getting employer contributions.
You could also consider increasing your pension contributions before or after your career break to mitigate the impact of stopping contributing during that time.
Analysis by Standard Life for The I Paper found that if you started saving at 25 until 68 with an overall contribution rate of 11 per cent, you would have a total pot with £255,000.
But this would rise to £279,000 if you saved 12 per cent and £302,000 if you saved 13 per cent.
Tom Selby, director of public policy at AJ Bell, said: “Saving regularly into a pension as early as possible is the single most effective way to boost your retirement income in the long term.
“Even small increases in contributions can make a huge difference in retirement.”
Track down and consolidate old pots
If you’ve had several jobs, you likely have a few pension pots lying around that you might have forgotten about.
You could also be paying higher fees than you need to be, which eat away at your savings.
Consider tracking down your old pensions and putting them all into one place so you can keep tabs on your savings and ensure you’re paying a low charge.
To track down old pensions, you can use a service like Gretel, which only requires your name and address.
It helps speed things up if you know which companies hold your pensions or even have your account numbers. You can find this information on old paperwork relating to your pensions.
If you open a new pension and request to transfer your old pensions in, your new provider should do the rest of the legwork for you.
Check your investment performance
While you’re taking a career break, you might as well ensure that your pensions are working as hard as possible.
You can check the performance of your funds in any online accounts for your pensions.
You can also look at other investment options and check how they have performed. If you aren’t happy with your fund, you can request to switch to a different fund.
You could also consider setting up a Self Invested Personal Pension (SIPP), where you are able to pick your own investment options if you feel comfortable doing so.
These accounts usually have more investment options than a typical workplace pension. Consider speaking to a financial adviser if you need help.