New research shows that one in five people in the UK have cut back or completely stopped saving for retirement due to financial pressures. This decision, however, can have serious consequences on their long-term financial stability. Men, younger individuals, and higher earners are the most likely to have reduced their pension contributions, despite the fact that rising inflation means people need to save even more for a comfortable old age.
Less Saving in Pensions
The survey conducted by Hargreaves Lansdown reveals that 14% of people have halted their pension contributions, and an additional 8% have reduced their contributions. Men are more likely to have taken these actions, with 25% having stopped or cut back on saving, compared to 18% of women. Younger individuals also face greater challenges, as 31% of 18 to 34-year-olds have reduced their pension savings, compared to 20% of 35 to 54-year-olds, and 17% of those aged 55 and above.
Surprisingly, the research found that wealthier individuals are also more likely to have cut back on pension contributions, despite recent government efforts to increase pension tax relief allowances for higher earners. The survey found that 35% of individuals earning over £125,140 have stopped or reduced their contributions. Similarly, 38% of higher rate taxpayers and 18% of basic rate taxpayers have taken these actions.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, suggests that higher earners may be more exposed to the current high mortgage rates and variable rate debt, “One potential explanation could be that higher earners are more exposed to the high mortgage rates we are seeing at the moment and are more likely to have variable rate debt so may now be in a position where they now need to cut back.”
The survey also reveals that 62% of respondents have not changed their approach to pension contributions, indicating that a majority have managed to maintain their savings despite financial challenges.
The ramifications of halting pension savings are significant. For example, opting out of pension saving for just five years in your 20s can result in a £114,000 reduction in your eventual retirement fund. Not making contributions for ten years can result in a staggering loss of £202,000. The impact of these gaps lasts throughout an individual’s life, unless they can make efforts to fill them later on.
However, experts stress that those who are forced to stop pension contributions to meet current financial needs should only view this as a temporary solution. Once their financial situation improves, they should resume saving for retirement to avoid a shortfall in old age.
The research conducted by Hargreaves Lansdown highlights the fact that one in five people in the UK have reduced or stopped saving for retirement due to financial pressures. This decision, however, can lead to a significantly diminished retirement fund, as demonstrated by the potential losses of up to £202,000 over 10 years. It is crucial for individuals to resume their pension contributions as soon as they are able to do so, to ensure a more secure future. Additionally, taking advantage of auto-enrolment, increasing contributions with pay rises or new jobs, and exploring potential employer matching schemes can help individuals get their pension back on track after a difficult period.