More employees cutting pension saving to pay bills, says research

According to the Pensions Management Institute, there is a growing trend for employees to reduce payments into pensions – and putting their future financial wellbeing at risk

Since the Covid-19 pandemic, people have faced a multitude of challenges affecting their finances, none more so than the cost-of-living crisis. Recently, the pressures on household income has raised concerns that members will look at their pension contributions as a way of cutting their monthly costs.

While the Department for Work and Pensions reported in October that there had been no significant rise in people opting to stop paying into workplace pensions, new research from the Pensions Management Institute (PMI)* suggests that this may be changing.

It reveals that of those saving into a pension scheme over the past 12 months:

13% have reduced their contributions and a further 20% are considering doing so over the coming months.
7% have already ceased contributions.
17% of those old enough to do so have withdrawn money from their pension savings to meet short-term needs

Impact of the cost-of-living crisis

Jonathan Watts-Lay, director of financial wellbeing and retirement specialist WEALTH at work, and also the PMI’s Financial Education partner, says: “It’s alarming that these latest figures suggest that the cost-of-living crisis is having a detrimental impact on pension savings, with so many already reducing or stopping their contributions and some people even dipping in to them to supplement short-term needs.

“With many more people considering reducing their contributions over the coming months, it is set to get worse before it gets better.”

He adds: “It’s vitally important for members to understand that opting out of their pension will have a huge impact in the long term and will cause damage to their standard of living in retirement. Reducing contributions now would make relatively small savings each month, but the impact on their retirement savings for later life will be dramatic, due to lost employer contributions and tax relief.”

Watts-Lay added that the damage caused by dipping into pension savings early to supplement income in the short-term can be irreparable, so should be a last resort.

The new findings also reveal that people are worried about their retirement prospects:

75% of working people are ‘concerned’ that the cost of living crisis will mean that they will have a less comfortable retirement.
70% believe that they will have to defer retirement and typically expect they will need to work for an extra three years due to the crisis.
28% believe that they would never be able to retire at all.

Says Watts-Lay: “For those approaching retirement, it couldn’t be more important to make sure they have a plan in place. Many will be concerned if they can afford to retire now, especially if their pension value has fallen due to market volatility. As the research shows, many are considering delaying retirement. Another option could be to work part-time instead.”

Boost pensions if you can

Watts-Lay adds that pension scheme members may want to consider making further pension contributions to boost their pot and take advantage of the tax relief while they can. But they should be aware that if they have made any withdrawals from their pension, other than the tax-free lump sum, the Money Purchase Annual Allowance will limit the amount that can be paid into a defined contribution pension to £4,000 a year.

He says: “It would be devastating for all the hard work that is put into helping pension savers build up their funds to be undone due to a knee-jerk reaction to the current financial pressures. This is why members must be supported to protect their pensions, especially in times of crisis.

“As part of an overall financial wellbeing objective, many employers now offer their workforce support to help them understand the value of their pensions and workplace savings, as well as how to best manage their money during turbulent times. This includes providing financial education workshops, one-to-one guidance or coaching and digital tools and helplines, as well as regulated financial advice.”

*Research was commissioned by the PMI and completed in November 2022. Research based on Censuswide survey of 2,000 working people.