Reducing contributions could see young savers' pensions diminish by a quarter

A saver aged 25 could diminish their pension in retirement by a quarter if they reduce their pension contributions amid the cost-of-living crisis, modelling from Broadstone has shown.

The modelling revealed that by reducing their pension contributions by 2 percentage points (from 8 per cent to 6 per cent), younger savers could lose out on up to £60,000 in retirement if these reductions become permanent.

This represents a quarter of the £240,000 they are projected, by Broadstone, to have in retirement without these reductions.

The modelling also detailed the effect on savers of different ages, showing that 35-year-old savers could experience a reduction of £39,500 in their pension, 45-year-old savers could see a £22,400 reduction, and 55-year-old savers could experience a £10,600 reduction for the same cutback in contributions.

Broadstone called on employers and schemes to maintain records of staff that have reduced their pension contributions so that they can be contacted and encouraged to restore payments back to at least recommended levels.

It also urged employers to apply rapid pragmatism to their pension scheme rules to ensure that employer contributions are not reduced or ceased completely if employees need to reduce their own pension saving levels in the face of cost-of-living challenges.

Broadstone head of pensions and savings, Rachel Meadows, commented: “As household budgets are squeezed more and more towards the end of this year, it is unrealistic to expect all pension savers to maintain their current contribution levels.

“Freeing up some additional income may be a sound and necessary financial decision although we would encourage all people to seek help to see if there are other ways to meet their day-to-day spending given the tax-efficiencies and employer contributions that pension savers benefit from.”

Meadows also emphasised that it is crucial that the pensions industry works with schemes and employers to ensure when cost-of-living pressures start to recede that these temporary reductions do not become permanent.

“The prospect of 25-year-olds entering retirement with around £60,000 less in their pensions pot – in a system which is already riddled with fears of widespread under-saving – is hugely problematic,” she continued.

“For the sake of our future retirees – and to save greater dependency on the state in retirement – we must get this right.”

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