M&G Wealth warning over pension holidays

Kirsty Anderson, pension specialist for M&G Wealth, said while the cost-of-living crisis was "continuing to place a strain on people’s bank balances", it was understandable that many people were "having to take action to free up more cash for the here and now".

But she warned: "While reducing pensions contributions might seem like a quick fix to free up money, savers need to be aware of the financial implications this could have for them later in life."

Savers should equip themselves with as much information as possible before making changes.Kirsty Anderson, M&G Wealth

Her comments came as research carried out on behalf of M&G Wealth has revealed that 20 per cent of Britons have reduced or stopped pension contributions into their workplace pension altogether as a result of the cost of living crisis.

Many have also cut back on valuable financial advice, or intend to do so.

Anderson said this could have serious long-term consequences.

She said: "Pensions are one of the most efficient and lucrative forms of saving, especially for those in companies with an employer-matching scheme, meaning there might be better ways of raising short-term funds.

"Our data shows that even taking a short break from your contributions could have a significant impact in retirement."

Wealth Unlocked

The data was revealed in M&G Wealth’s Family Wealth Unlocked report, ahead of the UK Pension Awareness Week this September. 

It revealed UK savers were scaling back their pension and investments to deal with high inflation and high interest rates. 

But individuals reducing their monthly workplace pensions contributions from £200 to £100 could cost them up to £271,619 in their total pension pots, or a difference of £20,919 in annual income. 

But the research warned that doing so could lead to poorer outcomes in retirement:

• Savers are potentially missing out on attractive tax breaks 
• They are also not benefiting from compounding
• They are not able to benefit from employer matching on contributions into workplace schemes.

For those looking to increase short-term money by temporarily halting payments for a three-year period before increasing back to previous levels, it would still cost them up to £59,158 in retirement. 

For adults earning the average UK salary of £27,756 a year contributing the minimum auto-enrolment amount per month (£143.44), temporarily halting contributions for three years at aged 30 could impact their final pot by £21,792. 

This would leave them with a pot of £173,013, compared to a pot of £194,805 if they continued contributions at current levels (see table).

Table: Potential final retirement savings and annual income from various contribution rates

Source: Prudential Retirement Modeller/M&G Wealth

Anderson added: “In an environment where every penny counts, savers should equip themselves with as much information as possible before making changes – from the use of free online tools to the services of a financial adviser for those with bigger pots of money.”

Pensions were not the only areas where Britons have made cutbacks.

The survey found that almost two fifths (37 per cent) of respondents have reduced their savings or investments, and a further 27 per cent of people plan to do so by next May.

The primary drivers of concern were the rising cost of living and interest rates, with 84 per cent of respondents worrying about inflation, and 72 per cent stating they were concerned about rising interest rates.

Some 30 per cent have also reduced spending on financial advice and a further 23 per cent said they would reduce spending on advice before May 2024.