Pension providers take action to prevent reduced contributions

Earlier this month, senior corporate pension specialist at Scottish Widows, Robert Cochran took to Twitter to reveal that the firm was filming some content for people who are looking to reduce contributions.

Speaking to FTAdviser, Cochran said: “We know that many people are worried about their financial wellbeing while others may be looking to make adjustments to their monthly outgoings to make ends meet. 

“But before making any decisions, we urge people to consider the long-term implications of reducing pension contributions to help ease the current financial pressures. Paying in less now can have a big impact on the overall income when they come to retire.”

Cochran explained that it is not just about individual contributions as if someone is in a workplace pension scheme, their employer pays in too.  

“Those who withdraw from workplace pension will miss out on these extra payments,” he said. “Some employees will be paying above minimum contributions to their schemes and may be able to reduce payments whilst keeping contributions above the auto-enrolment minimum – this will maintain a level of employer contribution.  

“But it is likely to have a negative impact on the value of their pension pot over the long-term.”

He added: “With that in mind we strongly recommend people seek professional financial advice if they’re able to before making changes to their pension.”

Likewise, Canada Life said it has been talking about this through its own channels, mainly Linkedin.

Earlier this month, the provider released figures which showed through consumer research that one in 20 people have stopped their pension contributions because of the cost of living crunch. 

This is happening across both the private and public sector.

The research revealed that a further 6 per cent of savers are actively thinking about pension pausing, while 9 per cent might consider doing so in the future.

This comes as inflation jumped to 10.1 per cent last week, after the UK saw prices rise by the steepest gradient in 40 years last month. 

As concerns grow about the worsening cost of living crisis, households are feeling the squeeze on their personal finances.

According to Canada Life, opting out of a company pension for just one year could reduce the value of your final pot by 4 per cent, all other things being equal.

This is based on someone earning £50,000 a year, paying a contribution of 8 per cent and pausing contributions for a year.

Canada Life technical director Andrew Tully, said: “The rising cost of living crisis is putting an incredible amount of strain on people’s finances. With economists expecting inflation to peak into double digits later this year, the squeeze on the nation’s finances will only get worse. 

“It’s understandable that people who are really feeling the pinch are considering opting out of their pension. Affording food and heating in the present day will always take priority over saving for the future. However, it’s important that anyone who does decide to opt out of their pension remembers that they can choose to re-join the scheme as their financial situation improves.”

Tully added: “It’s worth remembering if you are in a company pension scheme you can often only choose to stop or start contributions once a year, and you will miss out on valuable top ups from your employer and the government.”

Canada Life said this is certainly a topic it will revisit and will consider how to promote positive messages around pension saving, “but striking the balance with the needs of many people today who need to make ends meet”.

Too early to tell

Meanwhile, managing director at Legal & General Retirement Solutions, Emma Byron, said: “It’s too early to tell but it’s something we are keeping a close eye on.”

She explained that L&G have not yet found evidence from its workplace pension book of more people delaying retirement, reducing or stopping their contributions.

“Although we have seen that people are drawing down more from their personal pension, it is too soon for us to attribute this to the cost of living,” she said. 

“It is inevitable though that with the cost-of-living crisis biting, people will be considering whether they should access their savings earlier and/or drawing down at higher rates.”

But Byron said L&G has seen an increase in people choosing fixed term annuities.

A fixed term annuity provides customers with a guaranteed income for a predetermined term and is often used as ‘bridging’ income until another source of pension income kicks in, for example, the state pension, she explained.

It can also be used as an ‘underpin’ to ensure a customer has a guaranteed income, usually to cover their essential spending. 

“I anticipate as rates improve, and in the context of continued economic uncertainty, annuities overall will grow in popularity because they offer certainty and can be used to ensure essential living expenses are covered,” she said. 

“Supporting customers financial wellbeing is core to what we do and we urge anyone struggling to contact us first to talk through the issue.

"Cutting back on pension contributions in the short term can have long term implications and from a workplace pension perspective it can also mean you miss out on free cash from your employer contributions and tax relief."

If budgets allow it, Byron said, it can often be better to look to reduce spending elsewhere, though this may not be an option.

L&G are encouraging customers to use wider support services like the Midlife MOT, MoneyHelper and The Money and Pensions Service.

In addition, Aviva told FTAdviser that its half year results showed net flows into its wealth business remained strong at £2.68bn, despite market volatility.

A spokesperson said: “[The] Office for National Statistics (ONS) figures in April 2022 showed that despite the uncertainties of the pandemic, participation in workplace pensions last year rose to a record high – with 79 per cent of employees participating in workplace pensions in 2021, up from 78 per cent in 2020. 

“Savers were encouraged not to cancel their pension savings through the pandemic, and despite competing pressures it seems this message was heard.”

sonia.rach@ft.com