Have you stopped saving into your pension as a result of the Covid-19 pandemic?
New research from Legal & General has found that workers in their fifties who put pension savings on hold could be nearly £100,000 worse off at age 75.
The calculations show the impact on pension savings for those in their fifties who stopped monthly contributions and failed to start saving again, but continued working full-time until their retirement.
Legal & General initially ran their research back in May, and found that people aged 50 to 59 years old had cut back on their retirement savings by an average of £175 a month.
Updating the research, it turns out that the average being saved towards retirement remains £165 a month lower than it was before the onset of the pandemic.
We know that Covid-19 is placing a great deal of strain on personal finances for many, and there are some dire predictions about the future economic impact of the pandemic.
Cutting back on pension contributions can feel like a logical place to start when finances are tight.
The future impact of stopping your pension contributions will depend on the age at which you stop, and the age at which you start again, if at all.
According to the analysis, a 50-year-old earning the average UK wage of £30,566 a year, with a pension pot of £61,000 would be nearly £100,000 worse off by the age of 75 if they never saved into their workplace pension again.
By opting out of payments, they would be left with a pension pot over a third smaller at £170,617, compared to the £269,297 they would amass if they maintained their regular monthly contributions.
This assumes that the individual continues to work full time up until their retirement age.
However, by re-instating pension contributions in 3 years’ time, they would still be able to accumulate £256,559 by the time they are 75, meaning a loss of just £12,738.
Opting back in quicker means losses are limited further; paying back into the scheme within a year means losses of £4,274 and a break of just 6 months means being £2,517 worse off in retirement.
A 50-year-old aiming to retire at the age of 70 would be retiring with £204,225 if they stopped contributions entirely, £65,331 less than if they had carried on making regular payments.
A three-year break would see this reduced to losses of £10,370, a year £3,480 and a 6-month freeze would see the pension pot reduced by just £2,050.
If you’re in your fifties and want to retire by the age of 65, stopping or cutting pension contributions could make this goal difficult to achieve.
A 50-year-old who continued to make payments would be left with a pot of £153,621 at 65, but ceasing payments now would see that cut by over a quarter to £113,070.
If the same saver was able to start making contributions again within 3 years, they would accumulate a pension pot of £145,180, missing out on £8,441.
Again, getting back to contributing as quickly as possible pays off, with a 1-year break depleting a fund by £2,832 and a 6-month gap by just £1,668.
Chris Knight, CEO, Legal & General Retail Retirement, said:
“The pandemic has thrown millions of people’s retirement plans off course and has inevitably forced many of those struggling to make ends meet to opt-out of their workplace pension.
“For those in their fifties, stopping contributions now can have a big impact on their savings and ability to retire as planned. From our own research, we already know that that 1.5 million workers aged over 50 will delay their retirement as a direct result of the Covid-19 pandemic, with workers who had been furloughed or taken a pay cut during the pandemic most likely to delay retirement.
“These are of course challenging times, but while it may be hard to look past current difficulties, it is important not to lose sight of the long-term benefits of saving into a pension to secure a comfortable retirement.
“Despite current circumstances proving challenging, we would urge those who have already saved something for retirement to maintain their contributions. Pausing them may be tempting, however people should explore every possible alternative before considering this.
“For those who have already taken the difficult choice to opt-out, our projections highlight how vital it is to prioritise enrolling back into the scheme as soon as they are able to do so, to limit the losses to their retirement fund.”