The Salary Calculator

Navigating pension pots in times of financial crisis

by Madaline Dunn

Saving into a pension can help safeguard your future; the state pension is just £203.85 per week, and the cost of living is only increasing. However, the cost of living is also making it more difficult than ever to save into a pension, and increasingly the research shows that people are unable to afford to do so and are cutting back on contributions in order to afford the basics.

At The Salary Calculator, we’ll walk you through,

• What the data shows about people not being able to afford pensions
• The percentage of self-employed people that don’t pay into a pension
• How much is it recommended that you save into a pension?
• What the consequences of not saving into a pension are
• Where to go for advice and guidance

More and more people can’t afford to pay into a pension

According to a survey commissioned by insurer Aviva Life and Pensions Ireland, the cost of living crisis, and energy crisis are negatively impacting people’s ability to take sustainable action in their personal lives, despite a desire to do so. For example, the research found that four in ten people aged between 55 and 65 would like to hold some investments, this includes pensions.

However, while nearly 90% are eligible (over 22 and earning over £10,000 per annum) for the automatic pension enrolment scheme, more people are either stopping or reducing their workplace and personal pension contributions.

The number of people doing so reportedly increased by almost a third between March and July 2022.

Some proposed solutions to help counteract this have included increasing the amount that employers pay in under the scheme from 3% to 6%, allowing workers to supplement their disposable income. Others have suggested that employers opt to continue contributions while workers take a “temporary contribution holiday.”

What percentage of self-employed people don’t pay into a pension

While there’s an increasing number of people reducing or stopping their pension contributions when it comes to the self-employed population, which makes up 4.39 million workers, only 16% save into a private pension.

Further to this, as the number of self-employed people has risen, the number contributing to a private pension has fallen. It makes sense then, that a recent report from the Office for National Statistics (ONS) found that there’s a significant difference in the average pension wealth between employed and self-employed, with the latter, more likely to report not being able to afford to pay into a pension.

Further, the Institute for Fiscal Studies found that, for those self-employed workers that do pay into a pension, most rarely increase their contributions, even as their income rises. Indeed, nearly half kept their contribution at the same level for two years, and for those who had saved into a pension for nine years, one in five never increased their contributions. The average contribution is just £600 per year.

How much is it recommended that you save?

When it comes to saving into your pension, there are a lot of numbers thrown around, some advisors suggest that you contribute as much as ten times your average working-life salary by the time you retire. Others suggest that you aim for the ’50-70′ rule, which means you end up with an annual income that is between 50 and 70 per cent of your working income.

Elsewhere, it’s recommended that if you’re 30 years old, 15% of your salary should be pension contributions; further some advise that by your mid-thirties, you need to have twice your annual salary saved into your pension pot.

Of course, for many, this isn’t a feasible option, and many people have more immediate priorities to think about. Speaking about this to The Independent, Rebecca Aldridge, managing director of Balance: Wealth Planning, said that focusing solely on building up a pension pot “ignores the reality of life” for most people under the age of 35.

Indeed, it overlooks high levels of debt, and the expenses associated with raising children and childcare, for those who have them.

“Most worryingly in my view, most have little in accessible savings, making them incredibly vulnerable if they are made redundant, can’t work due to illness, want to take longer parental leave or so on. A healthy pension fund won’t help with any of those,” she said.

Instead, Aldridge recommends building a strong foundation by saving a little each month, enough to work toward paying off debt, and building up a savings fund of six months. After this, she explains, it makes sense to put money into “a mixture of other savings pots.”

What are the consequences of stopping paying into a pension?

More and more people are feeling less confident in their ability to afford retirement, according to research from Hargreaves Lansdown. In fact, 39 per cent feel this way, up from one-third a year prior. And the cost of living crisis is compounding the issue.

Speaking about this, Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrisey, said that the real shift has come from people who were “unsure if they had enough to retire” who now seem to know they “definitely don’t” as their costs rise and their investments “took a pounding.” Further, she said that while the younger you are, the better your chances of boosting your pension contribution, for those coming up to retirement age, “the prospects look bleak.” This, she said, is why more and more people who have retired are returning to work.

“Many believed they had enough set aside to see them through retirement, but the enormous hike in the costs of essentials such as fuel and food is making many revisit their plans. Though we expect inflation to start falling this year, it is likely to remain a squeeze on peoples’ plans for the foreseeable future.”

However, many finance experts advise that while it might feel tempting to pause your pension contributions, so you can divert that money elsewhere, it could come back to bite you in the long run. Not only will you miss out on your employer matching your contribution, you’ll also no longer benefit from the tax relief the government pays on those contributions. Even pausing for a period of two years could see tens of thousands of pounds wiped from your pension pot, depending on salary and contribution.

Where should I go if I’m seeking advice?

Considering the long-term consequences of cutting back on contributions, it’s a good idea to speak with a financial adviser who can give you a deeper understanding of how it might affect you later on, alternatives and ways in which you can mitigate the effects of reducing your contributions.

Some sources which can help and point you in the right direction include:

• Unbiased 
• Money Helper
• Citizens Advice 

Tags: investments, pension, private pension, self employed

Investing in financially challenging times 

by Madaline Dunn

When each day the headlines regarding the economy are worse than the last, warnings of skyrocketing energy prices, excessive food and petrol costs, and forecasts that it’s only going to get worse, you may be counting every penny. Investing is likely to be the last thing on your mind when juggling your finances in this challenging financial crisis.

That’s what the research shows, too. According to one study, 24% have stopped contributing to investments and savings because of the cost of living crisis. Meanwhile, 14.1% of British households don’t hold any investment, even though most have at least six months’ worth of “essential spending cash.”

That said, experts say that it’s perhaps not the best plan to abandon ship and that continuing to invest might actually benefit you in the long run.

At The Salary Calculator, we’ll walk you through:

• Whether not you should continue investing during the cost of living crisis
• What are the risks and how can you safeguard yourself
• How you should invest

Should you invest?

People are indeed becoming more cautious around investment, however, Becky O’Connor, head of pensions and savings at Interactive Investor says some are still making regular contributions. However, O’Connor explained that it’s “understandable” that people are more reluctant to part ways with their money and expose it to risk, “given the current outlook for household budgets” that people are “looking to make cutbacks wherever they can.”

As a result, research from Scottish Friendly reveals that investment levels have fallen to their lowest in three years in the second quarter of the year. This figure stands alongside the total value of new adult investment ISA policies, which has dropped 6%.

Explaining the reason for this decline, Simon Phillips, an independent financial adviser and partner at Devon-based Continuum, said: “Cash is not making anything due to inflation, but many people tend to think that if the economy is struggling or the stockmarket is volatile, that they should cut back on stocks and shares and keep money safe in cash.” However, Phillips argues that from a financial point of view, that approach is the “worst thing you can do” because it means you will miss out on investing at “what could be a good time from an equity standpoint.”

Sarah Coles echoes similar sentiments when discussing future savings:: “If you do cut back on saving for the future when money is tight, it’s worth considering when you’ll be able to bump contributions back up. A few months away from a pension isn’t going to make a dramatic difference to your retirement, but if it drags on and you don’t have a plan for beefing payments up again when your finances ease, then you could end up with a horrible surprise in retirement.”

According to the experts, if you have built up a robust emergency fund to ensure that you have security when the hard times come, it could be beneficial for you to explore investment.

What are the risks and how should you safeguard yourself?

One of the main barriers to people diving into the world of investment is that many don’t feel confident exploring that space. For many, there’s the misconception that investment is only for people with lots of money. This perhaps explains why 46% of people don’t feel confident when it comes to investing.

It is certainly true that investment comes with risks. After all, if the stock markets blossom, so will the value of your investment, and vice versa, if the markets crash, your investments could take a hit. Not all investments are created equal though, and some pose more risks than others. According to the experts, government bonds are considered less risky, but will return less profit, meanwhile, shares are riskier, as are trusts and cryptocurrency, the latter of which is becoming increasingly popular, but also incredibly volatile.

When it comes to minimising risk, diversification is an essential component, while Barclays recommends investing globally to get access to a range of economies. It’s also suggested that when thinking about investment, you consider the long-term implications and you only invest funds you don’t need across the next five years. It’s also important that you review your investment portfolio regularly to make sure that you’re meeting your goals and not exposing yourself to risk.

Tips for how you should invest?

When considering investing, it’s important that you put the research in, and make sure you pick the right options for you, your financial situation, and take into account the level of risk you are willing to expose yourself to.

In a cost of living crisis, some recommend that investing in defensive stocks, which include “essential goods and services,” can be a good option, as they often outperform the market, when there are financially difficult times. Likewise, dividend stocks can also generate funds quickly.

Guidance from finance experts also suggests that you should drip-feed your money into investments, which can reportedly help you benefit from pound-cost averaging. It’s also important to note that when the economy looks grim, you are also more likely to be able to buy low-priced stocks.

Tags: cost of living crisis, Economy, investments, savings

Savings and investment help from Hargreaves Lansdown

by Admin

If you are trying to save for your retirement, or just for a rainy day, it can be difficult to understand what your options are and what is best for you. Should you get an ISA (Individual Savings Account), or a SIPP (Self Invested Personal Pension)? What are the pros and cons of each, and why might you open a savings account instead?

Fortunately, Hargreaves Lansdown have created a series of guides intended to help you make the most of your savings – the guides are free to download, all they ask is that you provide some registration details. If you would like to know more about investing for the future and the tax benefits of doing so, try their introduction to SIPPs, or the beginner’s guide to ISAs.

Also of interest to readers of The Salary Calculator might be the calculators on Hargreaves Lansdown’s site which can help you plan for your retirement.

Tags: calculators, Hargreaves Lansdown, investments, ISAs, pension, personal pension, savings, SIPPs