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Looking after your pension pot when you change jobs
Did you know that changing jobs multiple times can negatively impact your pension’s value when you retire? If you are planning on switching jobs this year, it is important to bear this in mind for the future and learn how to avoid a reduction in your pension pot as a result.
What impact might a career move have on your pension?
When you start a new job, your employer may delay starting your workplace pension enrolment by up to three months or until you have successfully completed a probation period. As a one off, this won’t have a significant impact on your pension pot at retirement, but if you change jobs frequently, these breaks could end up making a dent in your pension’s value when it comes to retirement.
Let’s break it down:
If you were to change jobs every five years, with each change triggering a three-month contribution break during probation, the projected value of your pension at age 67 would be £21,000 less than if you had stayed with the same employer (assuming you earn the median salary for each age group throughout your career with a 3% employer contribution, an average annual growth rate of 5% after charges and before inflation, and a 5% personal pension contribution).
If you changed job five times, twice in your 20s and once in your 30s, 40s, and 50s, this could reduce your pension by approximately £15,000. While changing 10 times: three times in your 20s and 30s and twice in both your 40s and 50s, this could reduce your pot by nearly £30,0001.
These estimations don’t take into account the possibility that a new job may pay better than an old job which could increase contributions, or, on the other hand, your new job’s better salary may not come with a more generous pension scheme.
How to avoid a reduction
As the potential impact of a job change can be significant, here’s what to consider, to avoid being heavily affected:
1. Ask to join the scheme earlier
While employers are allowed to delay auto-enrolment by up to three months, if you ask, they must enrol you straight away, and, as workplace pension schemes are incredibly valuable, it is well worth asking. The personal and employer contributions, alongside the tax relief on personal contributions, can add up to a significant sum over time.
2. Increase your personal contributions
To counteract having changed jobs frequently, you could make up the shortfall by increasing your personal pension contributions. Speak with a financial adviser to calculate how much you need to add to your pension per month to boost your retirement pot.
3. Consider where your pension is being invested
The value of your pension depends not only on how much you invest but also on where it is invested. Your contributions will be automatically invested in the scheme’s default fund which may not suit your individual needs. For example, if you are in the early stages of your career, you may want to invest in higher-risk funds which could offer greater long-term growth potential. So, it is best to actively choose the funds that are right for your circumstances, which your financial adviser can help you with.
It’s easy to neglect your pension when you’re embarking on a career move, but taking the time to consider the impact on your future finances is well worth it. Pension planning isn’t something you want to get wrong, which is why speaking with an adviser can help you understand how much you should be investing, and how to close any savings gaps, so you can feel confident you’re on track to meet your goals.
If you want to optimise your retirement planning when changing jobs, please get in touch to arrange a no-obligation consultation.
1Median annual earnings for full-time employees in the United Kingdom in 2023, by age and gender, Statista, 2023
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