Around ten million UK workers have been placed into the government’s job retention scheme this year. As of October, the BBC predicts two million workers are still at home on just 80% of their normal pay.

For clients affected by the pandemic – either as furloughed workers or business owners – pension contributions might have been one of the first things to go. Paying your future self first becomes increasingly difficult with money worries in the present.

But reducing contributions – or stopping altogether – could have a massive impact on your clients’ pension pots at retirement. Here’s why your clients should avoid stopping their contributions if they can, and restart as soon as possible if 2020 has made a pension holiday unavoidable.

As many as a quarter have lowered or stopped contributions

A recent Money Marketing report confirms ‘that one in four people have cut their pension contributions during the Covid-19 crisis. With another 8% planning to do so in the future, coronavirus could hit a third of UK pension savers’ retirement funds.

Those below the age of 34 were most likely to have ceased contributions and men were more likely to have stopped than women.

Meanwhile, a Canada Life study, also reported in Money Marketing, has looked to calculate the potential loss at retirement for different age groups. It calculates that:

  • A thirty-year-old earning £30,000 and making minimum pension contributions (8%) could have £45,000 less at retirement after a three-year pension holiday
  • A fifty-year-old earning £100,000 and contributing 10% to their pension who takes a three-year contribution holiday could reduce their final pension pot by around £70,000

What stopping pension contributions means for your clients

1. Paying less now means paying more later

A pension contribution rule of thumb suggests taking the age when contributions start and dividing it by two. If a client starts contributing at age 30, they’ll need to contribute 15% of their monthly salary into a pension.

A 30-year-old with a salary of £32,000 would need to contribute £400 a month.

A client who only starts contributing aged 50 would need to put aside a quarter of their salary. The suggested contribution amounts include an employer’s contribution, as well as tax relief, but the later a client starts to save, the more they will need to find.

Taking a break from pension contributions increases the amount that will need to be put aside in later years. This might not be affordable for a fifty-year-old client already contributing a quarter of their monthly wage.

2. Stopping contributions could jeopardise retirement plans and mean compromise is needed

If the coronavirus pandemic has forced your clients to reduce or stop their pension contributions, they should look to start them again as soon as they are able.

Too long a pension break can lead to a shortfall at retirement and that might mean compromising on their retirement plans or their lifestyle in later life. The main ways for your clients to make up a shortfall are:

  • Top up their pension to make up ‘missed’ payments
  • Delay retirement to allow time for them to make more contributions
  • Change their retirement plans – either finding a way to live comfortably on a lower income or continuing to work in some capacity to supplement a lower income than planned

Speaking to us now could help your clients put a realistic and affordable plan in place, enabling them to make up their shortfall gradually and meet their retirement goals in terms of both age and lifestyle.

3. Taking full advantage of compound growth is the best way to see a retirement pot grow

Starting contributions early means that your clients have a longer time to make contributions and can, therefore, contribute more. Starting early also maximises the effect of compound growth.

Benefiting not only from the returns on their investment but also from the growth on those returns – and over an extended period – can have a massive effect on the overall amount your client has at retirement.

4. Over-reliance on a workplace pension can be dangerous but so can missing out on employer contributions

Auto-enrolment has had a massive impact on the pension landscape, greatly increasing the number of UK workers actively saving for retirement.

While this is good news, it could also lead to complacency. The current minimum contribution of 8% might not be enough to provide your clients with the retirement fund they want. An insufficient pension fund could see many of your clients living a less comfortable lifestyle in retirement than they had planned.

Taking the State Pension into account tops up a workplace pension but even that might not be enough. By speaking to your clients early on in their pension saving, we can work out a long-term plan that allows them to live their desired retirement lifestyle.

This might mean making pension top-ups or supplementing income with investments held elsewhere. In the meantime, though, the employer contribution your client is receiving is extremely valuable.

Not only does your client’s 5% auto-enrolment contribution receive a 3% top-up, but some employers will also match an increased employee contribution. Making the most of this is vital to building a retirement fund large enough to support your client’s desired lifestyle for the whole of their retirement.

Get in touch

If you have clients who would benefit from help in understanding the value of their current pension contributions and any gaps they might have, please get in touch with us. Email or call 0116 2407070.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation which are subject to change in the future.

Workplace pensions are regulated by The Pension Regulator