Young people may lose up to £60,000 of their pension savings if a “temporary” 2 per cent drop in contributions owing to the cost of living issue becomes permanent and the necessary level of saving is not restored, according to Broadstone.
Throughout their pension saving journey, 25-year-olds could forgo as much as £60,000, or 25 per cent of the expected total amount of their pot, putting them at risk for a significantly lower retirement income and level of living.
The data is based on an average wage that increases by inflation over the course of a working career up to state pension age, with a 2 per cent reduction in employee contributions.
According to the data, a 35-year-old would lose out on roughly £40,000, and even a 55-year-old who pays 2 per cent less into their pension on a permanent basis until they reach State Pension Age might see their pot worth drop by over £10,000.
But even if employers continue to make contributions, retirement pots might be reduced by up to 25 per cent if individuals reduce their own payments by just 2 per cent in response to the current crisis.
Broadstone head of pensions and savings Rachel Meadows says: “As household budgets are squeezed more and more towards the end of this year, it is unrealistic to expect all pension savers to maintain their current contribution levels.
“Freeing up some additional income may be a sound and necessary financial decision although we would encourage all people to seek help to see if there are other ways to meet their day-to-day spending given the tax efficiencies and employer contributions that pension savers benefit from. It is crucial, however, that the pensions industry works with schemes and employers to ensure when cost-of-living pressures start to recede that these temporary reductions do not become permanent.
“That is why we are issuing two clear calls to action to employers in the face of these threats. The first is that we call on all employers and schemes to maintain records of those staff that reduce contributions, in order that going forwards they can contact savers who have reduced their contributions to encourage them to restore payments back to at least recommended levels. We would expect this to happen every year as a ‘nudge’ to encourage greater saving – ideally at the same time of year as pay reviews take place to aid affordability.
“Our second recommendation is for employers to apply rapid pragmatism to their pension scheme rules to ensure that employer contributions are not reduced (or even ceased completely) if employees need to reduce their own pension savings levels in the face of cost-of-living challenges.
“Keeping to hard and fast rules around scheme minimum contribution requirements at a time like this risks exacerbating the financial harms that will be inflicted on employees – and won’t reflect well on employers.
“The prospect of 25-year-olds entering retirement with around £60,000 less in their pension pot – in a system which is already riddled with fears of widespread under-saving – is hugely problematic. For the sake of our future retirees – and to save greater dependency on the State in retirement – we must get this right.”
