Friday, August 12, 2022

Workers risk losing £13,000 in retirement if they suspend contributions for a year

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Someone who started working at 22 on a salary of £25,000 a year and paid basic monthly auto-enrollment contributions could have £12,764 less by the time they retire

With inflation at a 40-year high and rising energy costs, around 6 per cent of UK workers plan to reduce their pension contributions to make ends meet.

Brits risk having thousands of pounds less in retirement if they stop paying into an occupational pension for even a year, the analysis says.

But those starting on an average graduate salary could see their final workplace pension pot shrink by almost £13,000 if they stop making payments for a year, according to analysis by pension provider Standard Life.

It has been calculated that someone who started working at 22 on an annual salary of £25,000 and paid the basic monthly auto-enrollment contributions could have £12,764 less by the time they retire.

The calculation assumes annual investment growth of 6.5 percent with annual costs of 1 percent, inflation of 2 percent and a salary increase of 3 percent.

The basic contributions for automatic registration are 3 percent from the employee and 5 percent from the employer.

If the same worker stopped paying into his occupational pension for two years, the loss would rise to £25,335 and he would have a pot of £431,558 instead of the full £456,893 he would have if he continued to contribute.

According to the study, a three-year freeze would reduce a pension pot by £37,713.

Standard Life said it was “encouraging” that just 6 per cent of people plan to stop contributing, given the long-term impact this is having on retirement savings.

When it comes to savings, people are more inclined to reduce their energy consumption, with half of the 2,500 Standard Life customers surveyed saying they are doing so.

Three in ten say they eat out less, and nearly a quarter would cancel some subscriptions, and the same proportion plan to take fewer vacations.

About 15 percent said they are considering putting less money aside in their savings accounts.

But more people may choose to stop or cut pension contributions as the cost of living rises and other cuts aren’t enough — especially for lower-income households.

A separate recent survey showed that younger people are far more likely to cut their pension contributions, while 18 per cent of 18-34 year olds said they would invest less of their salary in the automatic enrollment scheme, according to financial services firm Barnett Waddingham.

Standard Life’s survey found that the majority are feeling the impact of rising expenses and rising fuel prices on their finances.

And three-quarters said they expect to have to cut back on spending or saving, rising to 86 per cent for households earning less than £20,000.

In comparison, wealthier people see less need for cuts – 72 per cent of households earning between £70,000 and £100,000 and 56 per cent of households earning more than £100,000.

Jenny Holt, Managing Director for Customer Savings and Investments at Standard Life, said: “Consumers have struggled with a lot so far this year. Since April alone, we have seen the upper limit for energy prices being raised, higher social security contributions and inflation recently at 9.1 percent.

“This is taking its toll on people’s finances as many have to cut back on their spending and savings.

“When possible, the first stop should be to reduce spending – for example, cut back on unnecessary purchases and look for cheaper deals.

“To do this instead of making decisions that affect future finances, such as B. reducing or stopping pension contributions, even if only for a short period, will be beneficial in the long term.”

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