I’m 40 and have £175,000 in my pension – if I stop contributing, will it be worth half a million at 65?

I recently turned 40 and have been with the same employer since I left university. I’ve built up a £175,000 pension pot.

I’m in the unique position of being mortgage free in a big enough house to be comfortable for my family – and I’m looking to drop down to part-time work and enjoy a bit more work-life balance.

I also have a sizeable pot of savings and investments to fall back on.

I’ve crunched the numbers on my private pension and want to know whether I’m barking up the wrong tree.

Using a saving and investing calculator, assuming 5 per cent growth per annum and factoring in the 0.4 per cent annual fee the pension firm takes, I work out that if all goes well, that should be worth £550,000 by the time I’m 65.

Am I missing something? Having the safety net of knowing I’ll have a half-a-million pension pot aged 65 will give me that final jolt of confidence to change career direction.

Tanya Jefferies, of This is Money, replies: You are in a good position to afford a career change but it’s understandable you want to be sure of what you are doing, and not damage your prospects of a comfortable retirement.

Abandoning pension saving altogether is a pretty drastic step, so it would be sensible to stick with it even if you can’t afford to save nearly as much as you used to do.

It’s not just about forfeiting compound growth on whatever you manage to contribute from here onward.

You would also be giving up free money in the form of tax relief from the Government, and future contributions from any employer even if you only work for them part-time.

All employers, no matter how small and modest they might be, are required to contribute into staff pensions as long as someone is 22 or over, their earnings are above £10,000, and they are willing to put in the minimum amount under auto-enrolment.

Many employers are more generous than the following basic deal, but the absolute minimum you need to stump up yourself is 4 per cent of your qualifying earnings between £6,240 and £50,270 of salary, then your employer puts in a further 3 per cent and tax relief from the Government is 1 per cent. Opt out of the pension scheme and all this is lost.

You should also ensure you continue making National Insurance contributions so you’re on course for a full state pension, which requires paying for 35 qualifying years.

The state pension, which is guaranteed until you die unlike the income from an invested pension fund, will be worth around £12,500 a year after the annual increase in April. You can check your current NI record here and your state pension forecast here.

We asked an experienced independent financial adviser to take a closer look at your options.

Adrian Murphy, chief executive of Murphy Wealth, replies: You must have made a lot of great decisions to have put yourself in this financial position.

Being mortgage-free in the right size of house for your family, having investments and savings to fall back on, and already having a decent-sized pension pot, all by the age of 40, is an enviable place to be.

All things being equal, you’re absolutely right – that £175,000 in your pension pot should grow to around £550,000 by the time you reach 65, based on the assumptions you describe.

While that probably sounds like more than enough for a comfortable retirement, there are a few important caveats to consider.

Firstly, and perhaps most importantly, returns are never guaranteed. 

We don’t know what the future will hold and you could find that, as you approach retirement, the market goes into a downturn and your pension – depending on the approach you have taken with it – loses value right as you’re about to begin drawing on it.

A 20 per cent market drawdown, of which there have been a few in recent years, could be the equivalent of more than £100,000 off the value of your pot at exactly the wrong time.

Alternatively, if your pension is de-risked ahead of your planned retirement date – moving into lower risk assets like bonds and cash – a 5 per cent return is highly unlikely.

In fact, if you are in cash for the years immediately leading up to retirement, you could find the returns are closer to nothing, right when a few percentage points could be worth tens of thousands of pounds in returns.

Check with your provider if you are in what’s known as a lifestyling strategy to find out whether this is the case.

It’s also worth remembering that while £550,000 sounds like a lot today, in 25 years’ time it’s unlikely to have anywhere near the same purchasing power.

What was £550,000 in 2001 is now the equivalent of just over £1 million and, if history repeats itself, you could find that your pot is worth about half what you would expect in real terms.

That’s also a very important point to consider for your pension pot’s longevity. If you plan to retire at 65, you could feasibly need your pension to last 20 years or longer.

If we say it’s two decades, that’s roughly an annual income of £30,000, by which point that is more likely to be the equivalent of £15,000 in today’s money.

And with the state pension age rising to 67 from 2028 – and likely higher thereafter – you may not be able to rely on that providing a boost in the first few years, further eroding your pot.

Your investments and savings provide a good buffer, but relying on those to subsidise income from age 40 is risky without a lifetime cash flow model – an exercise it would be good to run through with a professional adviser.

And, while it might be tempting to take your foot off the gas on your pension, the better option may be to keep putting in what you can – even if it’s a lower amount from going part-time or taking a lower-pressure job.

Even small contributions can make a big difference over time, and you’ll benefit from employers’ contributions and the tax relief provided by the government.

None of that should necessarily prevent you from switching careers, if that’s what you want to do. You’re in a great financial position and the tail shouldn’t wag the dog in this instance.

But, deciding to stop all contributions to your pension pot may be a step too far and end up leaving you short in retirement, even if on paper the numbers look like they make a lot of sense at the moment.

Did you change career in your 40s? Get in touch: editor@thisismoney.co.uk