Savers who reduce their pension contributions in response to the cost-of-living crisis could find themselves as much as £270,000 worse off when they come to retire, new research suggests.
A fifth of savers have already decreased or stopped paying into their pension in order to cope with rising costs, according to a survey by global investment manager M&G Wealth.
Doing so means they miss out on lucrative tax breaks and will not benefit from compound interest, which could significantly reduce the size of their nest egg.
For example, a worker who halves the amount they pay into their pension each month from £200 to £100 could be £271,619 worse off when they retire, M&G Wealth suggests.
Their income would be £20,919 a year – or £1,742 a month – less than if they had not decreased their contributions, it says. This assumes a 25-year-old paying in at this level until age 67, with a life expectancy of 87 – and a growth rate of five per cent.
Cutting back: A fifth of savers have already decreased or stopped paying into their pension in order to cope with rising costs
A 30-year-old who earns the average UK salary of £27,756 and makes the minimum pension contribution each month would be £21,792 worse off if they stop paying into their pension for three years.
Halting payments temporarily can also have a huge impact. Making no contributions for three years would leave a 30-year-old £59,158 worse off when they come to retire. Two fifths of those surveyed have also reduced their savings or investments, with half saying they had also cut back on buying everyday items such as shop-bought coffees.
Kirsty Anderson, pension specialist at M&G Wealth, says: ‘Pensions are one of the most efficient and lucrative forms of saving, especially for those in companies with an employer-matching scheme, meaning there might be better ways of raising short-term funds.
‘In an environment where every penny counts, savers should equip themselves with as much information as possible before making changes.’
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