One in 12 people are planning to stop paying into their pension during the coming two years in a bid to save money, research showed today.
An estimated 1.5 million people will take a pension contribution holiday during the period, collectively reducing the final value of their retirement funds by nearly £35 billion, according to insurance giant Axa.
Pension contributions fall as cost of living rises
The group said people aged between 35 and 44 were most likely to be planning to cut back on pension contributions in the coming two years as they struggled to keep up with rises in the cost of living.
Around 53% of people who are planning to take a contribution holiday said they were doing so to offset food and fuel increases or to clear debts, while 13% said they could no longer afford to pay into a pension because their mortgage repayments had gone up.
But the group warned that while taking a pension holiday may seem like an easy way to save cash, it could have a severe long-term impact on people’s quality of life during retirement.
Axa’s actuaries calculate that a 28-year-old man on average earnings who stopped contributing to his occupational pension scheme for two years would have a pension pot worth £33,800 less when he retired than if he had kept up payments.
The group said this shortfall would reduce his retirement income by around £592 a year when he came to convert his pension pot into an annuity.
A 35-year-old man would have £28,700 less to buy an annuity with when he retired if he took a two year contribution holiday, while a 55-year-old worker would suffer an £8,500 drop, reducing his retirement income by around £301 a year.
Save now suffer later
Which? Money editor Martyn Hocking said: ‘Many people are looking for ways to save in the current climate but cutting back on your pension is a purely short-term measure that will lead to bigger problems. If you put £300 a month less into your pension for two years you will have a pension pot that is tens of thousands of pounds short when you retire.’
For daily consumer news, subscribe to the here. If you have an older web browser you may need to copy and paste this link into your newsreader: http://www.which.co.uk/feeds/reviews/news.xml . Find out more about RSS in the Which? guide to news feeds.