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Helpful contribution: Underlining pension benefits in the face of income squeeze

April 20, 2023

If anyone were seeking evidence of the continued impact of the cost-of-living crisis, they need not look far.

The till receipts for weekly food shops and the monthly energy bills that drop through the door all clearly document how the UK is still experiencing the uncomfortable squeeze on disposable incomes that, according to the Institute for Government, was first felt as far back as late 2021.

More than a year later, there is little easing of this pressure. Despite the rate of inflation dropping back slightly from levels seen at the end of 2022, everyday living costs remain at elevated levels compared with the pre-crisis period and wage inflation is struggling to keep pace. What’s more, the government-backed support for energy bills is being scaled back from April at a time when prices are expected to rise.

As such, our personal finances are still under siege, with real household disposable income per person forecast to fall by 4.3% in 2022-23. This not only makes it likely that people will be looking to exercise caution with their spending, it also means people are will be finding it more difficult to save.

Impact on pensions

Just three years ago, limited opportunities to spend meant that Covid lockdowns artificially inflated the household saving ratio to a high of 24%. In 2023, this ratio is predicted to drop to zero as people struggle to find much surplus to stash away.

Retirement savings are feelings the effects of this trend. Recent research from Aon details a “significant shift” in the behaviour of pension-scheme members in the face of ongoing economic challenges. The study, based on responses from 132 UK direct contribution (DC) pension schemes, found that one in five (20%) had noted a rise in the number of requests to reduce or opt out of pension savings within the previous three months.

Statistics such as this bring into sharp relief the difficult decision that many scheme members are wrestling with, forced to choose between their long-term financial security and short-term expenditure demands.

What they don’t necessarily illuminate, however, is the basis on which a decision to pause or cease contributions has been made. It is not clear, for example, how much advice or guidance each member will have received, and how well-informed they felt at the time.

Indeed, not all employees will have a strong grasp of the financial impact that reducing contributions can have on the level of retirement savings they can expect to accrue, and the follow-on impact on their expected quality of life at retirement age.

Analysis from Standard Life reveals that even a brief interruption to contributions can make a significant difference. In the case of an employee in an auto-enrolment scheme (5% employee contributions; 3% employer contributions) who began working at 22 with a salary of £25,000 per year, the company’s analysis shows that a one-year break would reduce the member’s final pot by almost £13,000, while a three-year break would result in their pot being diminished by almost £38,000.

Making a well-informed decision

In the case of auto-enrolment schemes, employees retain the right to opt-out and cease being active scheme members. They have the potential to re-join at any point in the future, and will also be subject to re-enrolment every three years if they are eligible.

While some employees may be considering reducing contributions, this is not necessarily as straightforward as it sounds. The legal minimum contribution level is 8% of the member of staff’s qualifying earnings, which includes a 5% staff contribution. If total contributions are above this level, it might be possible to make a reduction without falling below the minimum contribution level. If they are already at the minimum, then little room for manoeuvre is left.

Employers cannot influence an individual’s decision to alter their pension arrangements. They can, however, engage employees in their pensions by encouraging education around retirement planning, underlining the advantages inherent in pensions, and illustrating how pensions can support long-term financial goals. At the same time, it is also invaluable to communicate the risks associated with reducing, pausing or stopping contributions.

Aon’s research shows that many pension schemes have put in place, or are considering, additional support measures for members in response to the cost-of-living crisis, with some allowing, or considering allowing, additional flexibility around contributions.

Such moves are understandable when times are tough and employees are weighing up whether to take the immediate reward of higher take-home pay rather than committing to their pension contributions. However, as shown above, that short-term gain can potentially result in longer-term pain, with scheme members missing out on contributions, tax relief and associated compound growth.

With reduced contributions, plans for later life can be affected and choices might need to change, such as how long you will need to keep working for to meet retirement lifestyle goals. As such, it is important that employers keep communicating with their workforce, ensuring that any decision they do make about pension contributions is made with a sound understanding of what the real long-term implications could be.


None of this should be considered to be financial advice and we strongly recommend that you obtain advice from a regulated financial adviser that is specific to your personal circumstances before taking any action on any of the matters covered in this communication / website. No warranty, whether express or implied is given in relation to such information.

The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Corporate or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.