The cost-of-living issue has caused a fifth of savers to cut or halt their workplace pension contributions, possibly affecting their retirement savings of up to £270,000.
According to M&G Wealth’s Family Wealth Unlocked report, UK savers who reduce their pension contributions to deal with rising living expenses may miss out on tax breaks and compounding benefits, resulting in smaller retirement savings.
The report finds that this will affect both workplace and private pensions with nearly 23 per cent of people who have private pensions also reducing their contributions.
According to the report, reducing monthly workplace pension contributions from £200 to £100 could result in a loss of up to £271,619 in pension savings or a difference of £20,919 in annual income. This would result in a drop in monthly income from £3,479 to £1,735.75, and temporarily stopping payments for three years before increasing them could still result in a loss of up to £59,158 in retirement.
It also found that for people making the £27,756 annual average salary in the UK and making the minimum auto-enrolment contribution of £143.44 per month, temporarily stopping contributions for three years at age 30 could lower their final pot by £21,792, leaving them with a pot of £173,013 as opposed to £194,805 with consistent contributions.
In addition to pension contributions, 37 per cent of respondents have cut back on savings or investments, and 27 per cent plan to do so by next May, primarily because of worries about inflation and interest rate increases, 84 per cent, and rising living expenses, 72 per cent, respectively. Additionally, 30 per cent of respondents have cut back on spending on financial advice, and 23 per cent plan to do so before May 2024.
Half of those surveyed have reduced spending on everyday luxuries, such as coffee, eating out, and magazines, and 44 per cent have cut their weekly food shopping expenses due to high shopping basket prices.
M&G Wealth pension specialist Kirsty Anderson says: “The cost-of-living crisis is continuing to place a strain on people’s bank balances, and many are having to take action to free up more cash for the here and now. However, while reducing pension contributions might seem like a quick fix to free up money, savers need to be aware of the financial implications this could have for them later in life.
“Pensions are one of the most efficient and lucrative forms of saving, especially for those in companies with an employer-matching scheme, meaning there might be better ways of raising short-term funds. Our data shows that even taking a short break from your contributions could have a significant impact on retirement.
“In an environment where every penny counts, savers should equip themselves with as much information as possible before making changes – from the use of free online tools to the services of a financial adviser for those with bigger pots of money.”
