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