Since the start of the coronavirus lockdown, one in 10 workers in the UK have decided to pause their pension contributions. A further 13 per cent have also considered halting their contributions according to research by Canada Life.
Additional analysis has revealed that over a third (37 per cent) of those who have paused contributions did so in order to pay for essential spending. 30 per cent of respondents paused contributions as a result of redundancy or furlough.
Another study by Aviva painted a similar picture. It found that 11 per cent of workers responded to the current economic climate by adjusting payments into their retirement nest-eggs.
Five per cent of those studied stopped paying into their pensions altogether, while six per cent reduced their contributions. The survey of 2,000 respondents also found that one in 10 workers aged between 45 and 55 were redrawing their retirement plans.
Since the lockdown began in March, millions of UK workers have suffered a reduction in income after being furloughed, many of whom worry they could lose their jobs as the COVID-19 crisis gets worse. However, even a slight pause in contributions now could have a substantial financial impact in the future.
Thousands of pounds in potential losses
Canada Life warned that pausing contributions for three years, which is the period of time before workers would be re-enrolled through auto-enrolment, could “wipe thousands off pension pot.” This is unless contributions are then increased “significantly” following a break from making regular pension payments.
It gave the example of a 30-year-old earning £30,000, who could lose as much as £45,539 from the value of their pension by opting out of contributions for three years. This would represent a drop in pension value at 67-years-old of 9.3 per cent.
If they wanted to make up this shortfall, total pension payments would need to go up from 8 per cent to 8.8 per cent, or the equivalent of an additional contribution totalling nearly £13,000.
The financial scenario is even worse for those closer to retirement. For example, a 50-year-old earning £100,000 with an existing pension valued at £100,000 could stand to lose £71,513 as a result of a three-year pension holiday. This is the equivalent of a 11.2 per cent drop in value.
“With Covid-19 hitting personal finances harder than ever it is not too surprising that many have started to view their pension contributions as discretionary,” said Andrew Tully, Canada Life technical director.
“While a three-year pension holiday may seem like a minor break in the context of a career spanning decades, our analysis shows that the long-term impact of that decision could be significant.”
Alistair McQueen, head of savings and retirement at Aviva, pointed out that people could have to work into their retirement years to make up financial shortfalls.
“Employees today are already working longer than generations before them, but as savings plans are likely to take a hit due to sweeping changes to circumstances, many now face the possibility of having to work for longer to enable their finances to catch up,” he said.