Pension schemes have been aided somewhat by the auto-enrolment process, which means all those eligible are automatically placed onto an arrangement. However, there still remains the option for Britons to opt out or temporarily stop their contributions. This is likely to be the situation facing a number of people as the financial impacts of the COVID-19 pandemic become palpably felt.
But analysis from pension provider Aegon has shown such a move could be cataclysmic for Britons, losing them substantial sums of money.
While providing a short term cash boost, the damaging effects of changing contributions in the long term are significant.
According to the company, if a person aged 25 on average earnings who pays six percent in contributions, and receives four percent from their employer, stopped contributions for three years, and then restarted, could lose £15,500 by state pension age.
Indeed, if the same individual reduced their contributions by just one percent of earnings until state pension age, they could lose out on £18,400.
Indeed, a smaller pension pot could mean in some circumstances people ‘outlive’ their retirement savings, and are forced to look for alternative sources of income, or rely on others.
Steven Cameron, Pensions Director at Aegon, commented on the matter.
He said: “For many, the coronavirus pandemic has placed an extreme strain on finances and individuals may look to areas that can ease the pressure.
“However, those looking to cut back on their pension savings levels should carefully consider the long-term effects on their retirement pot before making any decisions.
“While there may be an immediate boost to take home pay, Aegon analysis shows an employee in their mid-20s on average earnings could lose out on around £18,400 at state pension age if they decrease their contributions by just one percent, or a nine percent fall in retirement income.”
“But the saving in take-home pay would only amount to £14 after tax relief and the shortfall could be even greater if they are in a scheme where their employer ‘matches’ their contributions.
“If their employer also reduces their contributions by one percent, the shortfall would double to £36,800.”
COVID-19 has undoubtedly placed significant strain and financial difficulties on many households.
Some may feel it is absolutely necessary to stop or pause their contributions, in order to make ends meet.
However, Britons are generally advised to consider their other options and where they might be able to cut down on costs elsewhere before turning to their pension savings.
Mr Cameron concluded by offering further insight into the matter of pension contributions for Britons going forward.
He said: “The power of compound investment growth means it is the pension contributions paid in the early years that have longest to grow and make the biggest difference in ultimate retirement income.
“But for those closer to retirement, a small reduction in contributions can still have a big impact.
“Some employees might consider ‘opting out’ of their pension scheme for a period to ease financial pressures.
“However, it is important to understand the implications of this, as they will not only miss out on personal contributions, but also lose valuable employer contributions which help to boost retirement savings.”