Cash-strapped employees should not cut pension savings. Here's why

This year marked the 10th anniversary of auto enrolment, with more than 10.7 million employees enrolled into workplace pensions as of June. But how has the cost of living crisis affected pensions and what can employers do to help?

Q: How have rising living costs hit pension savings?

A: Department for Work and Pensions (DWP) figures show that there has been no significant rise in people choosing to stop contributions into workplace pension schemes. However, there does appear to be an upward trend for the newly enrolled opting out.

As the cost of living crisis continues, employers should monitor pension opt out requests and do all they can to ensure pension scheme members realise it really should be a last resort.

Q: What are the risks of cutting back on pension savings?

A: When someone opts out of the pension scheme, or reduces their contributions, they are likely to make relatively small cost savings each month, but the impact on their retirement savings in later life will be dramatic, due to lost employer contributions and tax relief. So it really should be a last resort.

It is understandable that employees may see pension contributions as a way of cutting their monthly costs. If employees are considering this, making the smallest reductions in pension contributions possible and avoiding opting out altogether will limit the reduction to retirement savings. Saving money is a habit, and once stopped it is difficult to start again.

Employees should first check all their outgoings to find other ways to save money first, eg cancelling unused subscriptions or memberships, shopping around for better deals on insurance on renewal, changing broadband and mobile phone suppliers and switching brands on their regular shop.

Also, discount vouchers are often available online and discount schemes may also be available through employers.

Q: How much should someone save?

A: It can be difficult for someone to judge how much they may need to save for retirement as everyone has different circumstances and different expectations.

There is much confusion about this and WEALTH at work’s survey found that more than a fifth (21%) have no idea how much their pension is worth, with almost a quarter (24%) having no idea how much they will need for a comfortable retirement.

It can be helpful to understand what level of income they may need in retirement. The Pensions and Lifetime Savings Association (PLSA) provides figures.

Q: Is 8% enough?

A: The PLSA believes the government should increase the level of automatic enrolment contributions to 12% by the early 2030s.

However, it could be difficult to make an increase against the backdrop of the cost-of-living crisis, when some people are struggling to pay their mortgages or rent and buy food.

Q: Should the auto enrolment age and earning limits come down?

A: One way to enable more employees to save into their pension through auto enrolment would be to reduce the auto enrolment age and the earning limit.

A government study revealed that more than two-thirds of employers are in favour of lowering the enrolment age from 22 to 18, which is in line with a recommendation by the DWP in 2017.

Q: What about when employees move jobs? Are there any issues about having multiple pension pots?

A: Having multiple pension pots is unlikely to be beneficial for most people. Employees need to be aware of this.

Firstly, there are flat rate charges for schemes with more than £100 in, so someone could be getting charged for multiple pots which could quickly diminish their savings.

Also, different pots could each have different investment strategies, and potentially different default retirement ages. It is important for employees to understand the significance of making sure their investment strategy and expected retirement age reflect their plans.

It is also a challenge administratively, as people need to update each pension provider as their plans change. When moving house for example, they would need to inform each pension provider with their new address.

Employees may want to consider consolidating their pensions into one pot, as it could make it easier for them to manage their finances, rather than having to check the performance of multiple accounts.

If they are changing jobs, it is important not to transfer their existing pension until they have left, to ensure they receive all their employer contributions.

Q: What can employers do to help?

A: Overall, auto enrolment has been a great success, but more needs to be done to ensure employees understand how valuable their pension savings are, as well as how to make the most of them.

For example, an employee in their 20s, saving an extra 1% a year with their employer matching this, may be able to increase their pension pot in retirement by 25%. It is also crucial that employees understand the damage they are doing to their standard of living in retirement if they reduce their pension contributions now.

As part of an overall wellbeing objective, many employers 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 in times of crisis.

This includes providing financial education workshops, one-to-one guidance or coaching and digital tools and helplines. This can help employees to build their financial resilience.