Should I cut back on my pension contributions to make ends meet?

Mounting evidence that persistent savers are cutting or stopping pension payments has led to warnings about the damage this is doing to chances of a decent retirement.

If you don’t save for retirement for five years in your 20s, it could blow a £114,000 hole in your final pension pot, and if you don’t pay for 10 years, you’ll lose a whopping £202,000, according to a new study.

The strain on household finances as daily bills soar has led to fears that people of all ages will see cutting pension contributions as an easy way to save money, without realizing the lasting impact on their finances .

Those who have no choice but to stop paying pensions to pay food bills and keep a roof over their heads are urged to consider this as just a temporary solution, until their financial situation gets back on track.

We look at worrying trends in retirement savings and the potential impact on retirement finances, and round up tips from money experts below.

Are you lowering pension contributions?

A growing number of employers are reporting that staff are asking for retirement contributions to be cut or stopped, according to LCP’s 2023 Financial Wellbeing Survey.

It found that 51 per cent of employers said employees have requested reductions in pension contributions, and 47 per cent have seen them ask for contributions to be stopped altogether, while 10 per cent expect both to happen in the future.

The survey of 10,000 employees and 500 employers also found that saving for retirement has fallen from number one to number six in people’s financial priorities.

“This has been replaced by budgeting and managing everyday money as people deal with the impact of the cost-of-living crisis,” says LCP.

“There has been a lot of speculation that people will cut or stop their pension contributions if they try to save elsewhere when life gets more expensive.

“Our research highlights that this is a trend that employers are beginning to see and expect to increase.”

A survey by Barnett Waddingham found that one in 10 of a survey of 2,000 adults cut back on private retirement savings at the end of last year, up from 6 percent when the same poll was conducted in the summer and fall.

Partner Mark Futcher says, “People should only consider this as a last resort. While it may help alleviate immediate financial strain, it still means rejecting “free” contributions from the IRS and your employer.

“Hopefully, the trend to reduce private pensions will not translate to the workplace, and we recommend anyone considering this to talk to their employer first.

“Perhaps they could increase employer contributions for workplace plans or even consider continuing to pay employee contributions if you need to take a temporary break from contributions.”

Hargreaves Lansdown conducted a survey last fall on whether people are changing their retirement plans as a result of the cost-of-living crisis.

It found that 4 percent paid less into their pension and were expected to retire later, while 5 percent said they paid less and would have a worse pension as a result.

What damage can stopping pension savings do?

The study below from Standard Life shows the enormous impact that a gap in pension savings can have on your final pot.

It focuses on delays in saving in your 20s, which have a major knock-on effect from the loss of compound investment growth — return on return — which takes time to make its full potential felt.

However, gaps will have a lasting impact at any point in your life unless you can afford to fill them later.

If you can afford to contribute more to your pension, Standard Life will show you the positive impact this will have on your final pension pot.

No choice but to stop saving for pension? Keep it as temporary as possible

“High inflation has weighed on our finances for quite some time and with people looking to cut further, pension contributions may have to be reduced or even halted for a short time,” said Helen Morrissey, head of pensions analysis at Hargreaves Lansdown.

“It is important to continue to contribute where possible, but given the extreme conditions, some people simply have no other choice at the moment.

‘It is important that contributions are restarted as soon as the weather improves.’

Morrissey suggests making a note in your calendar every few months to see if you can afford to restart or increase retirement contributions.

Meanwhile, if you’ve opted out of a workplace plan, you’re automatically re-enrolled every three years, but you should avoid having a three-year gap in retirement contributions, she adds.

Standard Life’s managing director for clients, Dean Butler, says: ‘It feels unbelievable that delaying paying a pension by just five years in your twenties could result in more than £100,000 out of pocket in retirement, but it leaves see how crucial the early stages of retirement savings can be as you start building your pot.

“When you first start working, retirement feels like a long way off and so it can be tempting to think about it and focus on the short term.”

But he warns that the longer you wait, the worse off you could be by the time you stop working, saying that later in life you may have to make large lump sum payments, significantly supplement monthly payments, or work longer hours .

“It is therefore much more realistic to start saving early and consistently, rather than trying to fill gaps in the future.”

How much do you need for a comfortable retirement?

Savers need a pot of £630,000 to invest or £643,000 to buy an annuity at retirement to fund a comfortable old age, according to a recent survey by RBC Brewin Dolphin.

That assumes a person is also eligible for a full new state pension, currently worth £10,600 a year, to reach a total income of £37,300 a year.

The annual cost of a financially secure old age is based on the industry standard measure of what people need for a minimal, moderate or comfortable retirement.

Incomes of £12,800 and £23,300 a year are needed for a basic life and a decent lifestyle in retirement respectively.

This is based on various baskets of goods and services such as food and drink, transportation, vacations, clothing and social outings, compiled in the Pensions and Lifetime Savings Association’s annual Retirement Living Standards report.