As the cost of living continues to rise, a recent report suggests that a quarter of UK adults are facing short-term barriers to pension saving.

The Office for Budget Responsibility (OBR), as reported by the BBC, is forecasting the greatest drop in living standards since records began.

With the Office for National Statistics (ONS) confirming inflation for April at 9%, and predicted to rise above 10% in the coming months, household fuel and petrol bills are soaring. Maintaining adequate pensions in this environment isn’t easy, but it is key to your clients’ ability to live their dream retirements.

Expert financial advice can help to realign budgets and ensure that crucial payments supporting your clients’ futures can continue to be made in the present.

Here’s how.

Paying our future selves first

When the spending power of your clients’ money falls, changes to household budgets will inevitably be necessary.

Expenditure without a tangible short-term benefit, such as pension contributions and insurance premiums, might seem like an easy thing to reduce. The long-term effects of this though could be huge (more on which later).

Successfully managing a household budget is key to your clients’ financial stability during the current crisis.

Simple cashflow modelling can help to identify areas where savings can be made and then the “50/30/20” technique can help to ensure monthly incomings are used efficiently and effectively.

Your clients will need to split their monthly expenditure into three categories and then pay a certain percentage into each:

• 50% will go on “needs” like household bills and rent or mortgage payments
• 30% goes on “wants” like restaurant meals or holidays
• 20% is put aside for savings like pension contributions or investments.

The key is to make sure the 20% is made at the start of the month, once all “needs” are covered. If your clients can pay their future selves first – and then successfully budget with what remains – they should be able to keep their pension saving on track.

Maintaining pension contributions is key to a dream retirement

While lowering pension contributions might seem like an obvious and easy way to save, there are several reasons why this is unlikely to be right for your clients.

Here are three of them:

1. Pensions are incredibly tax-efficient

Tax relief is payable on all pension contributions up to the Annual Allowance. This stands at £40,000 (or 100% of earnings, if lower), for the 2021/22 tax year.

Clients paying the basic rate of Income Tax will automatically receive tax relief at 20%. For those on the higher or additional rate, extra relief can be claimed via their self-assessment tax return.

The cost of a £100 pension contribution would be just £80 for a basic-rate taxpayer, while a client on the additional rate – who claimed their additional relief – would pay just £55.

Be aware that different allowances can apply in some circumstances so your client will need to be sure of the amount that applies to them. We can help here.

2. Lost investment growth and the effects of compounding

A pension is a long-term investment aligned to your client’s risk profile and timeframe. Regular contributions increase the size of a pension pot, which attracts interest. This interest is reinvested and will go on to attract more interest.

This is compounding, and the effects of compounding increase over time.

Regular contributions paid into a pension early – and then left alone – will achieve compound growth as well as the potential for greater investment returns.

3. The cost of a pension shortfall

A long-term financial plan will be based on your client’s desired retirement date and their chosen lifestyle in retirement. Changes to contributions could have a knock-on effect for both.

A pension shortfall could mean your clients need to work for longer or compromise on the type of retirement they want. This could mean living a less luxurious lifestyle or opting for phased retirement, working part-time to make up for lost pension growth.

It might be possible to top up a pension once the cost of living crisis abates but careful budgeting now is the best way for your clients to be sure their pension provision will be adequate.

A long-term plan and careful budgeting are key

The current cost of living crisis means that many UK households are facing tough decisions.

While halting or lowering pension contributions might seem like a good way to reduce outgoings, the long-term consequences could be huge.

With life expectancies – along with years lived in ill health – rising, pension pots have an increasingly important role to play. A fund might need to sustain your clients chosen lifestyle for three decades or more, while also providing for the potential costs of later-life care.

With a robust financial plan in place, your clients can make some simple budgeting tweaks and keep on track for their dream retirement.

Get in touch

If you have clients who would benefit from help managing their budgets and savings as the cost of living continues to rise, please get in touch. Email enquiries@boolers.co.uk or call 0116 240 7070.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.