One in 10 workers have paused pension contributions since UK lockdown began
Research conducted by Canada Life shows that one in ten workers have paused pension contributions, which could have serious implications for retirement hopes across the country.
Of those who paused contributions the biggest reason (37 per cent) was to use the money for essential spending. Thirty per cent had paused because of redundancy or furlough.
Pausing contributions to a DC pension for three years could wipe thousands off a pension pot unless contributions are increased significantly upon re-joining. Analysis2 by Canada Life has looked at the implications three-year pension holidays would have for individuals at age thirty, forty and fifty at different earning and contribution levels. Opting out of an automatic enrolment scheme will see people re-enrolled three years later, unless they make an active choice to re-join in the meantime.
The analysis reveals that a thirty year old earning GBPP30,000 could lose over GBP45,000 from the value of their pension by opting out of a pension for just three years. This would result in a drop in value of the pension at age 67 of over 9 per cent, or GBP45,000 less at retirement. To have the best chance of making up the shortfall they would need to increase the total pension payments by just below 9 per cent, an additional contribution of nearly GBP13,000, which could be made through additional employer contributions, employee contributions or a combination of both.
The results become starker as an individual gets closer to retirement. For example a fifty year old earning GBP100,000 a year with an existing pension valued at GBP100,000 could see their pension pot fall by over GBP70,000, or just over 11 per cent after a three year pension contribution holiday.
Andrew Tully, technical director at Canada Life, says: “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. 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. Any choices made now could have real significance to the quality of life in retirement so it is vital that the impact of this is understood properly, from the outset.
“It is worrying to see that 13 per cent of respondents were actively considering a pension holiday. However, there are some ways to mitigate the potential impact. Our analysis shows that losses can be recovered at each stage of a working life as long as there is a plan in place to resume contributions as soon as practicable. Savers will also need to understand that contributions will need to be higher than they were before and in some cases by as much as a fifth for those closer to retirement.”