Standard Life highlights the long-term impact of suspending pension contributions during the cost-of-living crisis
As the cost of living continues to rise and inflation hit a 40-year high just last week, the impact on household finances is taking its toll.
Insights from Standard Life, part of the Phoenix Group, highlight the importance of maintaining a savings habit in the current climate and the long-term impact of disruptions to savings.
By pausing pension contributions, savers will lose thousands in the future
The Standard Life study, based on a survey of over 2,500 customers, shows that 15% would put less money in savings accounts and 6% would lower their pension contributions if they had to cut spending.
This low number is encouraging, according to Standard Life’s analysis2 shows that reducing or stopping pension contributions, even for a relatively short period of time, can have a significant impact on the final pot – with the result that retired savers may be thousands of pounds less wealthy.
For example, someone who started working on an annual salary of £25,000 and paid standard monthly auto-enrollment contributions (3% employee, 5% employer) from age 22 would have a total pension fund of £456,893 by age 68 at that age . But stopping pension contributions at age 35 for just one year would result in a total pot of £444,129 – almost £13,000 less than if they hadn’t stopped paying. Stopping posting for a longer period of time would have an even greater impact:
Total retirement savings at age 68*
|No interruptions or premium reductions||Pension contribution freeze at age 35 for one year||Pension contribution freeze at age 35 for two years||Pension contribution freeze at age 35 for three years|
*if you start working on a salary of £25,000 a year and pay 3% monthly contributions to an occupational pension at age 22
cost of living bites
The risk of consumers sacrificing savings to meet their day-to-day expenses, while relatively low now, will remain as long as these challenging circumstances persist. More than three-quarters (77%) believe they will need to cut back on spending or saving, and unsurprisingly, those with lower household incomes are making the most cuts.
Of households earning less than £20,000, 86% say they need to reduce spending and savings, with 83% of households earning between £20,001 and £30,000 saying the same. This compares to less than three quarters (72%) of households earning between £70,001 and £100,000 and 56% of households earning more than £100,000.
Almost all (93%) say rising costs and high inflation will or are already affecting their financial health, up from 88% in the first quarter of this year. More than four-fifths (85%) say higher fuel costs have impacted their finances (vs. 76% in Q1), while 93% are feeling or will feel the impact of higher energy prices on their finances (vs. 88% in Q1). Q1).
Jenny Holt, Managing Director for Customer Savings and Investments at Standard Life said: “Consumers have had a lot to contend with so far this year and since April alone we have seen the energy price cap hike, higher social security contributions and inflation recently at 9.1%. This, of course, takes a toll on people’s finances, causing many to have to cut back on their spending and savings.
“When possible, the first stop should be to reduce spending – for example, cut back on unnecessary purchases and look for cheaper deals. Doing this rather than making decisions that affect future finances, such as B. reducing or stopping pension contributions, even if only for a short period, will be beneficial in the long term.”
When it comes to making cuts, reassuringly, that’s exactly what customers are currently doing. If they had to reduce their spending, half of Standard Life customers would reduce their energy use (51%) and spend less on luxury goods (51%). Three in ten (30%) would eat out less, while 23% would reduce their subscription services and 23% would also take fewer vacations.
Standard Life’s Jenny Holt shares tips for potential spending cuts in the current environment:
- Check your expenses for potential savings – “If you look through your monthly expenses, you might find that there are opportunities to make savings. Do you have subscriptions or memberships that you no longer use that you could cancel or pause? Spend a lot of money on things that are a luxury, such as B. Takeaways? A few of these small steps could make a difference.
- Look for better deals – “You may be able to switch household providers and find cheaper deals – for broadband or your mobile phone, for example. Many providers have package deals for new customers, so it’s worth checking a price comparison site to see if there are any savings.
- Set budgets – “To help you keep track of your spending, it can be worth setting a budget for things like grocery shopping and socializing so you don’t spend more than your means.”