Gone are the days when people spent their entire careers at a single company. By the time we retire, it’s likely that many of us will have changed employers several times.
But have you ever stopped to consider the effect that changing jobs could have on your pension savings? Here’s why you might want to start thinking about it.
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Changing jobs: how it affects your pension
As it turns out, changing jobs could leave a dent worth tens of thousands of pounds in your pension. According to a report in The Telegraph, switching jobs every five years can cut your pension pot by more than £25,000.
So how exactly does that happen?
Well, while it’s currently compulsory for every company in the UK to enrol its eligible staff in a workplace pension (auto-enrolment), when a new employee first starts, companies usually have a three-month period during which they do not need to enrol them in a pension. This is known as ‘postponement‘.
According to The Telegraph, if you change jobs several times in your career, these delays can add up over time. Ultimately, they could lead to you missing out on tens of thousands of pounds in pension savings.
Previous research has shown that the average Brit changes jobs every five years. According to The Telegraph, someone in the UK earning the average salary who does this before the age of 40 will give up around £22,828 by the time they hit 67.
Serial job hoppers – with perhaps 10 job changes over their careers – risk an even bigger cut to their pension savings of up to £35,000.
Keep in mind also that some employers will stop their contributions as soon as you hand in your notice. This means that if you have a three-month notice period, then you could go for as long as six months without having anything contributed to your pension.
How to reduce the impact
Needless to say, you can’t force a new employer to auto-enrol you in their new pension faster. However, there are things you can do to mitigate the impact of the delay on your pension. Here are three possible options.
1. Continue contributing to your old employer’s pension
Some employers will allow you to continue contributing to your old scheme even after you leave.
So rather than leaving your retirement pot in limbo as you wait for auto-enrolment, and therefore missing out on the potential growth of your money, it might be wise to at least continue putting something in your old pension if possible.
Your old employer won’t make any new contributions, but you’ll still get tax relief on what you put in.
2. Save into another tax-efficient account in the meantime
You can also lessen the negative impact of changing jobs on your pension by looking for another tax-efficient savings vehicle and saving into it in the meantime.
One great option is a stocks and shares ISA. Any gains from money invested in a stocks and shares ISA are exempt from tax. Each year, you can put up to £20,000 in this type of ISA and invest it in a variety of ways.
So, while you wait for enrolment to your new workplace pension, you can contribute to a stocks and shares ISA in the meantime and enjoy tax-free growth on your money.
You don’t even have to stop putting money into an ISA once you are enrolled in your new workplace pension.
In fact, a stocks and shares ISA can be a great supplement to a pension when it comes to building a retirement pot. One of its key advantages is that you can access your money as and when you need it, unlike a pension in which your money is locked until you are at least 55.
To learn more, check out our comparison of top-rated stocks and shares ISAs in the UK.
3. Make extra contributions to your new workplace pension once enrolled
Making extra contributions once you are enrolled in your new workplace pension scheme could help you fill in gaps that auto-enrolment delays might have caused.
Extra contributions to your pension will boost it immediately in the form of tax relief. Some employers will also increase their contributions to your pension if you increase yours, up to a certain limit.
