Cash-strapped workers should think twice before pulling the plug on their pension contributions, experts are warning.
Yet significant numbers seem to be ignoring that advice as the cost of living crisis bites – soaring energy bills, surging inflation and higher mortgage rates.
Doubly worrying because many are already failing to pay in enough for a comfortable retirement.
The alarm bells started ringing with research from Charles Stanley and digital pensions platform Penfold.
Charles Stanley found that a quarter of those surveyed, 2,086 UK adults, had already chosen to stop paying into their workplace pensions or were planning to in the next year. The number of people opting out of their company pension scheme increased by 29 per cent between March and July this year, according to research from Penfold.
Lisa Caplan, director of foundation financial planning for Charles Stanley, expressed “alarm”.
Especially as a lack of financial literacy was exacerbating the issue.
She said: “It related very much to education because we know that people do not engage with their pension and they do not understand what they are giving up when they do this.”
Often people did not see their workplace pension as their money “and feel they will never be able to access it. This is not true”.
She went on: “This kind of short-term thinking really adds up over the years and leaves people vulnerable to a less secure financial future.”
For the moment, any drop-off is yet to filter through into official statistics.
The National Employment Savings Trust (Nest), a publicly owned pension scheme set up by the government which now has 11.2 million members, stated that the opt-out rate for newly enrolled workers had largely remained stable at 10.2 per cent. It had seen a very small increase in the number of members becoming inactive, which included people who had chosen to stop paying in.
However, such a trend, if it is happening would be a lagging indicator, taking time to surface.
The website This Is Money highlights analysis by investment platform AJ Bell showing that if a 30-year-old earning £30,000 pulled out of their workplace pension for three years they would turn their back on £5,847 worth of contributions. This assumes the individual is auto-enrolled into a scheme with employees paying in five per cent of their pay packet and their employer contributing three per cent. But the real damage is done later, as savers will miss out on vital compound interest. By the time they retire aged 68, their pension pot would be £24,954 smaller than those who kept up their payments.
Tom Selby, head of retirement policy at AJ Bell, said: “If you opt out of your workplace pension scheme, you are essentially giving up your matched employer contribution – effectively a voluntary pay cut. Furthermore, you will miss out on the upfront boost provided by pension tax relief – 20 per cent for basic-rate payers and 40 per cent for higher-earners.”
Penfold’s extrapolation is similar – if a 20-year-old who contributes £200 a month to their scheme were to stop paying in for three years, the value of their final pension pot at retirement would fall by £28,000 – from £268,000 to £240,000 – assuming a retirement age of 67 and a five per cent annual growth rate.
Experts accept that In the very short-term knocking pension contributions on the head may help by providing some extra cash, and acknowledge it is difficult to criticise anyone who is in a desperate situation, or worries they soon may be.
Nevertheless, they stress, leaving a workplace pension scheme is almost always a bad idea and an absolute last resort.