One in 10 pause contributions due to cost of living crisis

Published on June 29, the Scottish Widows report, which surveyed a total of 5,025 adults, showed that on average these individuals reduced their pension savings by £37 a month. 

If this data were to be wholly applied to the UK, it would be equivalent to more than £2.5bn in lost contributions a year. 

Despite considering that the number of individuals who stopped saving into a pension — 11 per cent — is “a relatively low proportion of people”, Scottish Widows noted “it is concerning that some have been forced to do so”. 

A saver in their thirties, who has reduced their contributions on average by £47 a month, could have £1,000 less in their pension pot when they retire if they keep this lower level of pension contributions for a year, the provider stated.

“That may not seem like much, but more worrying is if the lower contribution becomes entrenched because they don’t get around to raising their contributions after the crisis has passed,” it added. In this case, the reduction in pension pot could be almost £23,000.

The research also showed that 18 per cent of respondents said their pension savings are invested in cash or cash-like assets, or low-risk assets such as UK government bonds. 

According to the provider, a cash portfolio will suffer an inflation-adjusted loss of 12 per cent over two years given current forecasts.

This means the average 35 to 54-year-old, who holds half of their £36,200 pension savings fully in cash, could be exposed to losses of more than £1,300 in a single year in real terms, and more than £2,100 in two years, the report estimated.

More than a third of self-employed people surveyed said they were not saving for retirement, equivalent to 1.2mn people aged between 30 and 64. In comparison, the rate for employees missing out on pension savings stood at 9 per cent. 

It has taken 14 years for real median wages to recover back to their 2008 peak, the report stated. 

Yet, regardless of this recovery, the average worker would have seen their income rise by £7,700, if pre-crisis wage trends of 1.8 per cent a year had continued. 

The report stated that “cumulatively, the median earner has ‘lost’ almost £78,800 of income since the financial crisis”.

The connection between wage stagnation and lost pension savings is further highlighted.

For example, an average earner, who was auto-enrolled in 2012, has saved £15,700 into their pot. With the additional wage growth, this would have been £21,300, which equates to a loss of more than £5,500.

The consumer price index increased to 9.1 per cent in June 2022, and due to this “rapid pace” of inflation it meant that median real wages have declined since February last year. 

In addition, the report predicted that energy bills will increase further in October, taking average annual household expenses up to £2,800.

It also estimated that the monthly cost of essentials is set to increase by £200 over two years, which will limit households’ ability to save towards retirement. 

Scottish Widows head of policy Pete Glancy said: “We are facing a myriad issues and there are no easy solutions. 

“It’s sadly understandable that households are being forced to make some tough choices in their budgets, but it’s important they do so while taking a longer-term look at their finances.”

Glancy noted that as a guide, individuals should “look to save a minimum of 12 per cent of their salary to secure a consistent quality of life, but aiming for at least 15 per cent is more likely to provide a comfortable retirement”.

However, he argued that the “public policy aim should not simply be to help people accumulate the largest possible pension pot, but to explore creative and holistic solutions to help them enjoy the best possible standard of living in retirement”.