The retirement provider has tracked the effects of the pandemic on retirement for the last year, and found that in August 2020, hardly any (2%) of pre-retirees were actively planning to save less for their retirement2. According to the latest findings however, almost one in eight (12%) are saving less a year on from the first national lockdown.
The most recent findings show that workers over 50 have decreased their pension savings by £142 a month on average, in response to the pressure the pandemic has placed on their finances. For many people in the UK who contribute into their employers DC pension scheme, reductions of this size equate to halting contributions entirely3, often with no idea on when they may be able to start making payments again.
Calculations from Legal & General show that workers in their fifties who have stopped saving into their pension in response to Covid-19 could be nearly £50,000 worse off at 67, and more than £65,000 worse off by the age of 70 if they fail to start saving again and continue working full time until their retirement.
The analysis shows the reality and the impact of freezing pension contributions in your fifties on the eventual retirement pot at ages 65, 67, 70 and 75 (table 1). Legal & General has also calculated the value of re-introducing pension contributions as soon as possible, evidencing the benefit of reinstating savings after 6 months, a year and 3 years (table 2).
Table 1 – Impact of opting out of pension contributions at the age of 50 for 6 months, 1 year, 3 years and the reality of never opting back in (£ figure represents total pension pot) (assumes the average UK wage of £30,566 a year, with an existing pension pot of £61,000)
Table 2 – Impact of opting out of pension contributions in your 50s for 6 months, 1 year and 3 years (£ figure represents amount lost) (assumes the average UK wage of £30,566 a year, with an existing pension pot of £61,000)
According to the analysis, a 50-year-old earning the average UK wage of £30,566 a year4, with an existing pension pot of £61,0005 would be £49,790 worse off by the state pension age of 67 if they never saved into their workplace pension again. By opting out of payments, they would be left with a pension pot nearly a third smaller at £123,772, compared to the £173,562 they would amass if they maintained their regular monthly contributions. This assumes that the individual continues to work full time up until their retirement age.
However, by re-instating pension contributions in 3 years’ time, they would still be able to accumulate £164,326 by the time they are 67, which would be just £9,236 less. Opting back in sooner means the impact is limited further; paying back into the scheme within a year means a reduction of £3,101 and a break of just 6 months means being £1,729 worse off in retirement.
“As the pandemic has progressed, we have seen increasing rates of retirement inequality in the UK. While some older workers have seemingly benefitted from the lockdown, large numbers have had to make some really tough decisions around their finances. The last year has thrown millions of people’s retirement plans off course and we now have 1.7 million people effectively opting-out of pension saving as they struggle to make ends meet.
“We know that many pension pots in the UK will not provide the income people hope for in retirement, and for those in their fifties, taking a hiatus will have a big impact on their savings and ability to retire as planned. It is therefore important not to lose sight of the long-term benefits of saving into a pension to secure a comfortable retirement.
“Although current circumstances are proving challenging, we would urge those who have already saved something for retirement to maintain their contributions. Pausing them may be tempting, however people should explore every possible alternative before considering this. Prioritising enrolling back into the scheme as soon as possible, to limit the losses and take advantage of the tax breaks, is also advisable for anyone who has already stopped.
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